Will Offices Come Back In Fashion? Contrarian Buyers Are Betting Millions On It

Jordan Menashe is excited about the future of office buildings. His family-run firm, Menashe Properties, has acquired four office properties in the last 10 months and is eyeing another.

It's a bet few are willing to take as office occupancy has stagnated far below where it was in 2019. But a growing number of investors are putting money behind the belief that remote work is still just a fad, and just like the fashion trends of the '90s that are back in style, office work is going to come back with a vengeance.

“We were all wearing skinny jeans just a year ago. But before skinny jeans, we were wearing jeans that were really baggy,” Menashe said. “Now, what are kids wearing on their first day of high school? The baggier, the better.”

Just like baggy jeans a few years ago, the bargain bin is filled with aging office buildings burning a hole in owners' and lenders' pockets.

Fire sales of office buildings are becoming more common. In the first half of 2024, eight office properties sold at discounts greater than $100M from their prior sale price, more than in 2022 and 2023 combined, according to Moody’s data provided to Bisnow.

But while Menashe and other bargain hunters project confidence that the cycle will turn in their favor, just like it did following the Great Recession, many are skeptical prices will ever bounce back on their own.

“You have these secular shifts that are taking place now, that weren't necessarily as big a factor in the mid-2000s,” said Bryan Reid, executive director at MSCI Real Assets. 

“The operating model for your typical office and your typical mall probably didn't change as substantially either side of the Financial Crisis as they have either side of Covid.”

Nearly $20B of office CMBS debt is expected to mature by March 2025, leaving owners eyeballing higher borrowing costs with lower occupancy than before the pandemic. While confidence in CMBS lending is increasing, S&P Global analysts characterized the office sector as “in deep distress” and “unfinanceable” as recently as April.

More distress is likely imminent, MSCI Chief Economist Jim Costello said. Even if some tenants with leases signed before the pandemic aren’t using space fully, they are still paying for it. But when leases expire, they might downsize and leave owners with less cash flow to pay off impending debt maturities. 

“That might also lead to those come-to-Jesus moments where [owners] are forced to accept losses because they simply can't refinance,” he said. 

In New York City, where some of the first marks of distress began showing up a couple of years ago, the pain has become more acute in recent months.

In March, GFP Real Estate and TPG entered into contract to buy 222 Broadway at a 70% discount — shaving off more than $300M from what Deutsche Bank’s asset management arm paid for it in 2014. In July, UBS Realty Investors sold the 20-story office building at 135 W. 50th St. at an auction for a 97.5% discount to its prior price.

Massive losses are piling up all over the country.

In March, a joint venture led by Florida-based Sigma Plastics Holdings jumped on the Schaumburg Towers in Chicago, acquiring the 808K SF pair of buildings for $74M after no bidder put down the minimum $75M bid at auction. In July, the county government in Seattle bought the Dexter Horton Building at 710 Second Ave. for $36.6M — far below the $151M it sold for in 2019. 

Some buyers may have jumped too soon.

Namdar Realty Group, which grew to prominence buying zombie malls and leasing them up for low rents, set out to replicate that formula by going after struggling NYC office properties with "optionality" to be revamped as office assets or converted into housing. 

It formed a joint venture with Empire Capital Holdings to buy 345 Seventh Ave. as part of a $107M deal in 2021, then acquired 830 Third Ave. in 2022. In June, the joint venture struck again, acquiring 321 W. 44th St. from Related Fund Management for an estimated 67% discount.

But its bets haven't yet paid off. In July, Namdar and Empire's lender, Benefit Street Partners, initiated a UCC foreclosure on 345 Seventh Ave., The Real Deal reported.

Namdar CEO Igal Namdar told TRD, “The current leasing market has been challenging for many commercial buildings in New York, and unfortunately, 345 Seventh Avenue has not been immune to these challenges.”

Despite office vacancy rates nationwide sitting at all-time highs, some investors say the deals hitting the market now are too good to pass up, especially as the number of fully remote jobs is decreasing and office occupiers are settling firmly into hybrid or fully in-person schedules that require office space.

Menashe Properties is betting that it can succeed where others have failed.  Streets, restaurants and public transit are busy, Menashe said, and the majority of employers’ hybrid work structures mean they still need offices.

The recent acquisitions made by the family firm include three in Portland and one in Illinois, all in cash and at heavy discounts.

Last September, Menashe bought 230 West Monroe, a 623K SF office tower two blocks from Chicago’s Willis Tower, for $45M. The most recent sale before that was in 2014, when Accesso Partners paid $122M for the building.

Last month, Menashe did it again, buying Montgomery Park, a historic building in Portland recognizable by its distinctive U-shape, for an 87% discount, $222M less than it had sold for before the pandemic. Menashe said the price amounted to “significantly less than land value.”

“Nobody will know that we're at the bottom until we've turned the corner,” he said. “It's a feel. There's only so many places to put money.”

Those who are buying offices are likely paying all cash because most lenders have no appetite for office acquisitions right now, HKS Real Estate Advisors Founding Partner and principal Ayush Kapahi said.

“There's great hesitation at this point in taking on any kind of debt within the office markets,” Kapahi said. “You just have a lot of supply issues and limited demand in the tenant market, so as an office owner, as an office lender, you're sitting in a bit of a storm at this point.”

But Menashe isn’t the only firm targeting office at a time when others are backing away. Investor David Greaney’s Synergy has snapped up three heavily discounted offices in Boston, wagering that he can turn around their fates as long as the assets are well located and there’s a way to add value to them.

“We think that equilibrium will be found and the new norm will exist, but office isn't going anywhere,” he told Bisnow this summer. “Commercial offices and the need for physical workplaces are not in any significant jeopardy.”

In D.C., PRP Real Estate Investment is one of the firms hoping to steady a flailing office market. The REIT acquired the Market Square office complex for $323M earlier this year. The prominent buildings last sold for $613M in 2011.

“Being one of just a few privately owned buildings on Pennsylvania Avenue in between the Capitol and the White House, being on top of the Metro station, being across from the National Archives and having this really unique architecture — it's a truly unique story,” Tom Wasko, PRP’s director of acquisitions, told Bisnow.

Between Market Square’s location and its architecture, PRP is looking at bringing in tenants like Fortune 500 companies that want to be able to fly in senior executives for meetings with elected representatives, Wasko said.

Still, analysts aren’t so sure that these bets will pay off, as there is no guarantee that office prices have hit their bottom.

The debt behind the current distress is also different to the debt that underpinned the Global Financial Crisis, Costello said: While there is a lot of CMBS debt sitting in the office sector’s current pile of distress, there’s also a lot of private debt from funds, insurance lenders and bank lenders.

“Those are groups that have more leeway to work with an owner when they run into trouble,” he said. “Nobody's been forced to realize losses yet.”

For deals that do work out, timing will be crucial, he said. Even though there is the opportunity to buy at low price points right now, most big leases signed before Covid have still yet to expire. The moment when tenants begin to vacate or downsize in larger numbers, reducing landlords’ cash flow and ability to service their debts, will be when the market truly finds its new floor, he said.

“We're approaching a bottom, but there's still a lot of pain that's going to take a long time to realize,” he said.

The acceleration seen this year in the pace of distressed deals indicates that the moment for opportunistic buyers may be coming, Costello and Moody’s Director of CRE Economics Matt Reidy said.

“You've seen a big uptick in these properties that are selling at significant losses,” Reidy said. “This is a healthy thing overall for the market because it does provide that price discovery and allows stronger hands to come in, take over a property and potentially redevelop it or reposition it and turn the property around with any luck.”

But for the deals being done right now, there has to be a plan in place if aspiring buyers are going to get lenders on board, Kapahi said.

“When there’s no business plan on the table, that’s when you’re seeing the type of pricing that’s happening,” he said. “Lenders don’t like speculative bets.”

CORRECTION, SEP. 4, 2:15 PM E.T.: A previous version of this story referred to Moody’s using an old name for the organization and did not contain the correct job title for Matt Reidy. This article has been updated.