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Not So Bleak: Finding Opportunities in Office

This is the final in a series of articles that examine the truth behind the negative headlines about the office sector. Previous articles include “CRE Experts Say ‘Not So Fast’ to Doom-and-Gloom Office Headlines,” “The Reality of Office ‘Give-Backs,’” and “Digging into Office Debt Maturities.”

Adam Finkel

A few years ago, the office sector could seemingly do no wrong. In its July 2020 report, Preqin indicated that “the office sector remains the destination for the majority of investment in U.S. commercial real estate, attracting 55% of all capital invested in the market since 2014.”

What a difference three years makes. Newmark recently reported that office investment sales in Q3 2023 had declined by 64% year over year, with office loan originations dropping by 54%. Still, “on the margin tertiary markets, suburban assets . . . have been more resilient,” Newmark analysts commented.

Furthermore, experts told Connect CRE that plenty of opportunities can be found amid the challenges faced by the office sector. “Entrepreneurial investors are likely to be presented with the opportunity to buy office for pennies on the dollar,” commented Eli Randel with CREXi. “The deals won’t be easily financed and will require ingenuity and effort, but if office health stabilizes, fortunes may be made.”

Tony Russo

Lee & Associates’ Tony Russo agreed, adding, “Whenever investors find themselves in a market like this, it’s an opportunistic market for entrepreneurial groups that want to get creative and have the funds to support that goal.”

On the Financial Side

One issue impacting most commercial real estate has been finding capital to buy and renovate. Lenders are pulling back on CRE loans. But there are still some ways investors can tap into creative financing. Aarica Mims with KDC suggested that cash-heavy investors could partner with landlords with loans coming due but no money to pay them down.

Aarica Mims

Furthermore, financing solutions can be found for well-located properties with stable occupancies and experienced operators. “These could find financing solutions through banks, life companies and CMBS,” said Adam Finkel with Tower Capital. “Properties trading at a steep discount below replacement cost should be able to find bridge financing.”

Conversions are a Thing

There’s been a great deal of chatter concerning office-to-other conversions. There’s also been a great deal of chatter that many office buildings don’t lend themselves to new usages. But there have been some success stories in this situation.

Ira Singer

Russo mentioned Lee & Associates’ involvement in a large Park Ridge, IL, office property conversion to multifamily use. “There is another property in Schaumberg being converted to a community center,” he added. Meanwhile, MDL Group’s Hayim Mizrachi commented on a recent trade of an office property in which the buyer will convert to retail uses.

Then there’s just keeping the office space, well, office space. “We have advised several owners to use their vacancies as an advantage and position their properties for sale to owner-users,” Mizrachi said. MDL is working with an owner of a 20,000-square-foot building that is losing a 17,000-square-foot tenant. “We’re going to help him create a commercial subdivision and map up to four office condos at 5,000 square feet each,” Mizrachi said.

Hayim Mizrachi

The takeaway is that conversions CAN work under certain conditions. Ira Singer with Mosaic Construction noted that building conversions aren’t limited to residential uses but can find new life as schools or churches. “Class B or C buildings in a good, walkable and amenitized location will most likely be acquired, reimagined and converted,” added KDC’s Mims. “If there is a Class C building on an island with no amenities, it might be time to break out the lifeboats.”

Looking at the Positive

Eli Randel

The experts explained that office office value reductions could provide potential investment opportunities for those with the capital.

“The very best assets in every market in the US are currently valued at excellent investment basis,” Stream Realty Partners’ Adam Showalter pointed out. “These opportunities have not been widely available to transact given their cash flow and that they might not have a debt expiration looming.” However, he added that given the office sector’s struggles, investors could find good-quality assets in well-performing markets for attractive yields.

Adam Showalter

CREXI’s Randel agreed with this assessment, explaining that the late Sam Zell excelled in finding distressed assets and making billions off those buys. New investors will come in to fill the gap that Zell left behind. “Others will buy low, add value and someday sell high,” Randel observed. “I’m looking forward to seeing these newcomers meet their legacies.”


Inside The Story

Tower Capital's Adam FinkelKDC's Aarica MimsMDL Group's Hayim MizrachiCREXI's Eli RandelLee & Associates' Tony RussoStream Realty's Adam ShowalterMosaic Construction's Ira Singer

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