A CBRE analysis says the pandemic sharply changed long-lasting office sales trends. What had been a pattern for more than two decades disappeared, and a new dynamic emerged.
The issue wasn’t the office market taking a hit after an economic slowdown. It continued to happen before the Trump administration’s volatile tariff implementations. In February, office properties saw prices drop 11% amid rising distressed sales, according to CommercialEdge.
Under earlier patterns, trading volume was high in 2007 and between 2015 and 2018. Both periods saw tight office availability and accommodating capital markets. And then at the start of the 2000s and after the Global Financial Crisis, we saw weaker occupancy and investment markets that were less interested.
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Post-COVID, significant changes occurred due to the Federal Reserve’s monetary policy, which pushed liquidity out to markets while driving down interest rates. Fixed-income investments could not provide solid returns. The 10-year Treasury note yield dropped below 1% in early March 2020 and wouldn’t cross 2% for two years.
Many investors who hadn’t focused much on commercial real estate started to, including office, even though vacancies were historically high, just the opposite of the previous decades. Perhaps the investors expected that there would be a return to office occupancy. Smaller buyers also played a large part, CBRE says, by taking advantage of easier financing on smaller properties. The underwriting was easier as 78% of buildings with less than 50,000 square feet had at least 90% occupancy levels. Only 45% of buildings with at least 800,000 square feet had similar occupancies.
Higher interest rates and weaker capital availability undermined the markets. Investors walked away because they couldn’t subsidize a long-term strategy of waiting for occupancies to return when hybrid and work-from-home changed the dynamics of the office market.
What might be next for office is hard to say. In April, Colliers and MSCI said that sector sales in February were actually up 55% year-over-year, but prices were down by 3%. A separate Colliers analysis pointed to a possible bottom for office assets. It was to be the light at the end of a five-year tunnel.
But then Blackstone, which had been looking more positively in general at CRE investment, just said that tariff policies and uncertainty are affecting CRE investments. The global trade shifts are acting like a black swan event that was highly unlikely, and which had an outsized impact on business as usual.
“It's early, it's too early to assess the full implications of tariffs, which depend on the outcome of unprecedented multilateral negotiations with perhaps over 100 countries around the world. The complexity of the situation means that patience and staying power are key,” said Stephen Schwarzman, co-founder, chairman, and chief executive officer of Blackstone.
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