Large office sales last year tumbled to a low not seen since the Great Recession, which industry pros say could mark the bottom for the beleaguered sector.
Some $30.57 billion of office properties valued at $25 million or more changed hands in 2023, down 59% from the previous year, according to Green Street’s Sales Comps Database. It’s the second-lowest annual volume on record — surpassing only the total in 2009 — with sales down across the 20 top markets.
Volume at all the major brokerages also fell sharply, and the rankings reshuffled amid the decline. Eastdil Secured emerged as the sector’s most active broker, rising from third place last year, while Newmark jumped to second from fourth. JLL slid one spot to No. 3, while CBRE, which topped last year’s rankings, fell to fourth place.
The severity of the sales decline came as little surprise. The office sector has been
battered since the onset of the pandemic, and it buckled further under the weight
of debt-market turbulence, making liquidity virtually nonexistent. Many office properties that came to market did not trade, and those that did sold at steep discounts.
Most pros say that 2023 represents the bottom for office transactions, though they caution that volume won’t improve substantially until liquidity returns in earnest.
“For many of our markets, I think we have hit bottom,” said Bruce Miller, a senior managing director and office group leader at JLL. “The numbers were so low in 2023, we definitely believe [sales] will pick up in 2024 … [but] getting lender activity back is going to be critical.”
Brokers broadly agree that the year ahead will bring a greater number of office trades.
Last year produced just 491 office transactions worth at least $25 million, the fewest in
13 years. Notably, sales at the higher end of the pricing spectrum were especially rare, with just six single-asset trades valued above $500 million, two of which were recapitalizations.
“Value and basis will continue to be well off peak and may decline further on a price
per square foot, but we expect the number of trades will increase,” said Chris Ludeman,
CBRE’s global president of capital markets.
Requests for broker opinions of value from both investors and lenders have ticked higher, which typically presage a rise in sales campaigns, he noted. In addition, borrowers and lenders increasingly are collaborating to find a path forward.
“There will be more short sales, loan sales and discounted payoffs — all of which creates liquidity,” Ludeman said. That suggests there will be greater willingness among
sellers to meet the market on pricing, which also has been a roadblock.
“Transaction volume may pick up because of a higher level of capitulation,” said Richard Coles, a founder and managing partner at Vanbarton Group. “But that may not necessarily indicate a recovering market,” he added, as that will come only when more “institutional capital designates the office sector as an investable asset class.”
It will take far more time for the market to recover from a valuation perspective. Office values were down 25% in the last 12 months and are 35% below their March 2022 peak, according to the Jan. 5 Commercial Property Price Index by Green Street, parent of Real Estate Alert.
Against that backdrop, some opportunistic buyers are gearing up to pounce as owners facing distressed situations or maturing loans are forced to sell.
“Opportunities to buy at historically attractive levels are starting in scale now, and probably the better-quality assets are going to be available in the short to medium term,” said Jeff Fronek, a managing principal and president of Tourmaline Capital Partners, which partnered with Monarch Alternative Capital last year on the $250 million purchase of the office building at 801 Brickell Avenue in Miami.
But to maneuver in this market, buyers must be able to navigate challenging lending conditions and complicated projections for future leasing demand.
“If a buyer can write a large equity check and doesn’t necessarily require seller financing and can understand the fundamentals of the asset … that is an exceptionally rare combination, particularly for assets that are not yet fully stabilized,” Fronek said. “That will continue to be a very powerful dynamic.
For years the office sector was a favorite among institutional investors, but sentiment soured quickly as the pandemic battered occupancy and muddied the outlook for future leasing demand. While that attitude persisted in 2023, there also were some signs of traction.
In the final three months of the year, for example, leasing volume rose 14.1% sequentially, as the number of firms seeking office space increased for the third consecutive quarter, according to JLL. Notably, buildings completed after 2015 registered positive net absorption every quarter last year.
“The narrative to office is shifting” among investors, said Stephen Van Dusen, a managing director at Eastdil. “Approaching four years since the pandemic [began], they are noting that Tier 1 assets and submarkets have demonstrated resiliency and outperformance” in both leasing and rental rates. “It is leading investors to draw their own conclusions … and it’s transitioning toward increasing transaction volume consistent with that.”
At the same time, the debt market is showing signs of stabilization. The yield on 10-year Treasury bonds has settled around 4%, while the Federal Reserve has telegraphed it could begin lowering interest rates this year.
“Dramatically lower office pricing with more clarity on interest rates and fundamentals should improve transaction volumes, at least in the first half of the year,” said Doug Harmon, co-head of U.S. capital markets at Newmark. “The storm of the century is beginning to subside across large office transactions nationally.”
In the broker rankings, Eastdil’s office transaction volume fell 55.3% year over year to $5.47 billion, but that was still good for a group-leading 23.0% market share. All of its major rivals saw more severe declines in office trading activity, with Newmark down 56.8% ($5.17 billion, 21.8% share), JLL down 71.4% ($3.89 billion, 16.4% share), CBRE down 74.5% ($3.77 billion, 15.9% share) and Cushman & Wakefield down 67.1% ($3.32 billion, 14.0% share).
Broker rankings are based on property transactions that closed in 2023 and involved full or partial stakes valued at $25 million or more. When multiple brokers shared a listing, the dollar credit was divided evenly, but each broker was credited with one transaction. Only brokers for sellers were given credit. Portfolio transactions were included if the package price was at least $25 million.
