Downward angle icon An icon in the shape of a downward angle. A Canadian pension fund has sold a stake in a New York office building for $1. AerialPerspective Images Canada's largest pension fund has sold a stake in a New York building for $1. The collapse in office prices has made investors cautious about the sector. Office buildings have suffered from a surge in remote work due to the pandemic.
Canada's largest pension fund, the Canada Pension Plan Investment Board, has recently completed a series of transactions at discounted prices, including selling a stake in a New York building for $1, Bloomberg reported Tuesday.
The pandemic-induced surge in remote work and high interest rates due to the Federal Reserve's inflation measures have raised concerns about commercial real estate, with the most serious fears centered around what some are calling “the end of the office.”
Office vacancy rates hit a record high in January and remote working is expected to continue, darkening the outlook for investors in the sector.
The Canada Pension Investment Board did not immediately respond to Business Insider's request for comment.
The group sold its 29% stake in 360 Park Avenue South for $1 at the end of 2023 to one of its partners, Boston Properties, which also assumed the building's pension liability burden, according to Bloomberg. At the time of the purchase, the plan was to redevelop the 20-story office tower.
The pension fund sold a 45% stake in the Santa Monica Business Park late last year for $38 million, about a 75% discount to what it paid for it in 2018, according to the report.
The Canada Pension Plan Investment Board, which manages a $436.9 billion endowment with a global real estate portfolio worth about $30.6 billion, is also limiting its holdings in the office real estate sector, though it is not exiting it entirely, Bloomberg reported.
The regional banking sector has seen volatility since Silicon Valley Bank collapsed a year ago amid growing concerns over commercial real estate investments by banks and other large corporations. Most recently, investors slashed shares of New York Community Bank over its exposure to commercial mortgage debt.
Some forecasters have floated the idea of converting office buildings into housing as a way to mitigate the collapse of office buildings while also adding inventory to an undersupplied housing market, but that requires financing and logistics that aren't always favorable for property owners.
Goldman Sachs said it expects office vacancy rates to rise to 18% over the next decade from 13.5% this year. Analysts at the bank wrote in a report on Monday that office conversions are not a solution to the housing shortage.
Meanwhile, Capital Economics predicts that office building prices have fallen 20% from their peak and the sector may not recover for decades.
Moody's economists also see further difficulties ahead for the commercial real estate market.
“Despite growing optimism about a possible soft macroeconomic landing and some encouraging news from the labor market, the persistence of the dynamic hybrid model will effectively suppress office demand, making 2023 the weakest year since the global financial crisis,” Moody's said in a recent note.