Between the plunging property values of aging buildings, decreasing demand in the aftermath of the pandemic, and unprecedentedly high interest rates for new loans and refinancing, office building real estate is suffering in unexpected ways. Several big office buildings across the US have recently been selling at substantially lower price points than they were deemed worth, with up to 70% of their total being discounted. As a result, investors who are willing to gamble on buying the buildings now may ultimately wind up making their investment back three-fold and then some.
This is exactly what has begun to happen. Take Yellowstone Real Estate Investments, who recently paid $185 million for 1740 Broadway, an office tower in Manhattan. A decade earlier, Blackstone had paid $600 million for the prime New York real estate. Further exacerbating this trend, two other real estate firms bought Midtown Manhattan towers for a price of less than $50 million each earlier this year. In response to questions of their motive, Isaac Hera, the chief executive of Yellowstone, said his firm was confident that “our current investments will not be adversely affected if office prices continue to drop… We never try to time the markets.”
CoStar is currently predicting that 2024 and 2025 will be the two worst years on record for office buildings being vacated, as the pandemic seems to have fundamentally shifted the mentality on the workplace and how many work in the US. As a result, many old, storied office buildings are no longer necessary to house the workforce of these large businesses.
Whereas the US workforce had essentially just kept chugging through all the technological change and innovation happening around it over the past several decades, the pandemic provided a pregnant pause in which many were freed up to reassess the value of such methodologies, with employers adjusting to the idea of not having their workers in the office five days a week. This has had a trickle-down effect of sorts, with employers requiring less space for workers, resulting in fewer businesses being willing to pay the massive rent totals necessary to keep space in such large buildings. Thus, with tenants vacating, the owners of the buildings inevitably have to sell, and so the cycle continues.
This year alone, the mortgages of 16 office buildings were foreclosed on, resulting in over $500 million in losses for investors. This is in line with 2023, which saw 26 mortgages foreclosed on, resulting in $265 million in losses for investors.
So what will these new owners do with such prime real estate in the form of office buildings? Yellowstone allegedly has early-stage plans to convert 1740 Broadway into apartments if the market does not rebound soon, to go ahead and begin recouping their investment. But even with these low prices and potentially high return value, these office buildings are far from a hot commodity.
Jeffrey Kaplan, founder of Meadow Partners, distilled it best, saying “It’s not feasible to convert all these ‘meh’ office buildings into residential. It’s still too expensive in a lot of cases.”
