Ever since the pandemic exposed the vulnerability of dilapidated office buildings, speculations about bargain prices in office buildings have been rife. It was not a question of if, but when. That time seems to be now. Bargain-seeking buyers are flocking to distressed office buildings in major cities, in some cases purchasing properties at discounts of up to 70% off previous sales prices. While the real estate market has seen a significant drop in transactions over the past few years, the recent increase in bargain transactions could mean big trouble for banks and those investing in mortgages. Here, we look at companies that have entered the distressed real estate market and explore what they are saying about their strategies and plans to utilize their new assets.
In Manhattan, the nation's largest office market, an office building owned by an affiliate of Related Companies is reportedly set to sell for less than $50 million. A joint venture between Empire Capital Holdings and Namdar Realty Group has agreed to buy 321 W. 44th Street, a 10-story property in Manhattan's Hell's Kitchen neighborhood. The price represents a roughly 67% discount from the nearly $153 million that Related Fund Management paid for the property in 2018. The companies have yet to reveal what they plan to do with the property, but their business strategies and histories offer some insight into what's to come.
Long Island-based Namdar owns a variety of asset types, but the bulk of its portfolio is retail properties. The company has a history of buying aging and outdated shopping centers and malls, so a foray into distressed office properties is not entirely unusual for Namdar. However, the company reportedly does not invest in upgrading properties, aiming to hold onto assets for the long term. Empire Capital Holdings' investment strategy focuses on both high-quality assets and more opportunistic properties that are amenable to conversion and repositioning.
In April, a vacant office building in downtown San Francisco was purchased for a fraction of its previous sales price. The 16-story building at 995 Market Street in the heart of the city's theater district was acquired for just $6.5 million, nearly 90% less than it was when it changed hands in 2016 for $62 million. Formerly the headquarters of Burning Man and the location of a spacious WeWork, the building had fallen on hard times after both tenants left and the building's owner struggled to rent the space. The building's previous owner, Bridgeton Holdings, defaulted on a $45 million CMBS loan in December 2023 after stopping monthly mortgage payments. As a result, the building was sold at public auction in April to LNR Partners, an affiliate and special servicing platform of Starwood Property Trust. LNR made a name for itself as an asset management and special servicing company for commercial mortgage-backed securities.
Another bargain deal in April was the purchase of 1740 Broadway, a prominent office building in midtown Manhattan, for $185 million by a little-known New York City-based real estate firm called Yellowstone Real Estate Investments. Just 10 years earlier, global investment giant Blackstone had bought the building for $600 million. Yellowstone's president said it plans to convert several floors of the office building into apartments, and that buying deeply discounted office buildings was part of the firm's strategy, and that it was confident that a continued decline in office prices would not negatively impact its current investment.
New York City, in particular, is attracting family offices and little-known developers looking for bargains on sought-after Manhattan real estate. Seven of the 11 office transactions completed in New York in the second half of 2022 were buyers that were family-owned businesses, high-net-worth individuals or small developers, according to Savills. “You’re starting to get buy-in from people who aren’t bound by the vagaries of the local market and are saying, ‘Wow, New York is cheap right now, let’s buy,’” said Will Silverman, managing director at real estate brokerage Eastdil Secured.
The rise in office bargain hunting isn't limited to New York. In Denver this month, two office buildings in one of the city's largest business districts sold at steep discounts. A joint venture between Westside Investment Partners and Knightsbridge Capital acquired the two adjacent properties, 8350 E. Crescent Parkway and 8390 E. Crescent Parkway, for a combined $14.1 million. The first building, 8350 E. Crescent, last sold in 2014 for $17.25 million. The partnership paid just $2.3 million for the office building this month, a reduction of 87 percent. The larger of the two buildings, a 135,000-square-foot unit at 8390 E. Crescent, last traded for nearly $30 million in 2015. Westside and Knightsbridge purchased the building this month for $11.85 million, a reduction of 61 percent. And in Fort Lauderdale, Florida, Starwood Capital Group recently sold a portfolio of four office buildings for $45 million, just over half what it paid for the properties nearly a decade ago.
A recovery in office sales volumes nationwide over the past few months has revealed just how much office property values have fallen, something the industry had long expected. As the increase in transactions reveals more about office property values, investors will be forced to recapitalize their loans to reflect the lower valuations, said RXR's Scott Rechler, who likened the commercial real estate market's woes to five stages of grief. “It's 2024, and we're in stage five of grief,” Rechler said. “People are just coming to terms with it now.”
Given what has happened so far during the recession, we will likely see more bargain hunters in the coming months, especially if interest rates remain at their current levels. However, not all markets are feeling the pain equally, and deep discounts of over 70% are still fairly unusual in the office market. Furthermore, deep discounts may also be related to other issues that will affect the final sale price, such as infighting between interested parties.