Office Buildings Aren't Selling, Not Even As Distressed Assets

Even though consensus has formed that the office sector has lost billions, if not trillions, of dollars in value, a distressed-sale market has yet to materialize.

Only $5M worth of office buildings were sold out of foreclosure in the first five months of this year, a microscopic figure compared to the $236M in foreclosure sales conducted last year, CoStar reported. Sales of office properties with the pressure of an impending securitized mortgage maturity dropped from $1.5B between Jan. 1 to June 10 of last year and $165M over the same interval this year.

Overall, U.S. office sales slumped to $9B in the first quarter, the lowest since the third quarter of 2010, CoStar reported. The few distressed sales that have happened reflect deeper discounts compared to market-rate sales than in the past several years, but prices haven't dropped enough to entice buyers.

One possible reason for the lack of enthusiasm is the existential doubt that has gripped the office industry as a result of stagnation in office occupancy rates among workers and the related lack of leasing activity. Many of the leases signed in the past year-plus have been for smaller footprints than the tenants had previously occupied.

In a market with so little interest for office acquisitions, the buildings themselves are often becoming something of a hot potato, with neither borrowers nor lenders enthusiastic about the prospects of paying carrying costs for buildings that lose cash flow as tenants depart.

Some landlords have shown a willingness to spend money in order to land loan extensions, which lenders are all too happy to provide. But a growing number of borrowers are giving up on their properties and either allowing foreclosures or deed-in-lieu transfers. Commercial mortgage-backed securities special servicers hold a combined 13.1M SF of foreclosed office properties with debt worth a total of $1.4B and an average vacancy rate of 36%, per CoStar.