Office Market May Have Hit Bottom After Wave of Discounted Sales

The office market may have hit its bottom following a series of stressed property sales at discounted rates during the past quarter, which have set a new pricing benchmark, according to a Reuters report.

Seven properties sold at a discount of more than $100 million during the first quarter, compared with two during all of 2023. These include the sale of a Midtown Manhattan office building that went for a 97% discount of its original price, accounting for a $276.5 million loss, according to Moody’s data.

According to the RCA Commercial Property Price Index, office prices have fallen 12.4% year-over-year. This trend has industry observers speculating that the worst of office distress may be behind us. An increase in transaction volume would confirm the industry’s comfort level with current pricing.

Many stakeholders have opted to extend maturing loans rather than sell during the past two years largely due to an unclear pricing benchmark. Office sales have averaged $13.4 billion per quarter since 2023, according to data from MSCI Real Capital Analytics. That compares with an average of $35 billion per quarter before the pandemic, which drove vacancies and higher operating costs.

Owners have also been waiting for lower interest rates while contending with low vacancies and revenues, making it difficult to pay interest on existing loans. Even with the Fed’s recent rate cut, up to three-quarters of $19 billion of maturing loans over the next year could struggle to refinance because they lack enough equity. One-third of loans maturing in 2024 have either failed to pay off or refinance successfully on time, according to CRED iQ. Experts suggest interest rates must drop 300-400 basis points to compensate for the decline in property values.

Parkview Financial is one lender that has elected to sell despite the challenging market. The company offered to sell $300 million of seven multifamily and office loans in New York, New Jersey and Connecticut via auction, Reuters reported. Parkview CEO Paul Rahimian said the firm received multiple bids at 95-98 cents to the dollar for four of those loans. Parkview plans to offer new loans with the proceeds of the sales.