Hello everyone. As we’ve seen this year, the ripple effect of several regional bank failures has notably impacted the commercial real estate (CRE) sector. One area drawing considerable attention is the office space market, which has faced growing risks due to a combination of tightened CRE lending standards and downward demand shifts.
The Federal Reserve’s aggressive interest rate hikes over the past 16 months, in a bid to curb inflation, have led to a more cautious approach in CRE lending. Additionally, low office-badge swipes and related occupancy metrics hint at a significant decrease in office space demand.
A recent and highly indicative case is the sale of an office tower at One South Street, in downtown Baltimore. The building, which comprises 479,000 square feet across 30 stories, was sold for $24 million – a significant 63.6% markdown from its $66 million sale price in 2015. The deep discount underlines the increasingly distressed conditions in the downtown real estate markets of major US cities.
As a commercial real estate broker, Terri Harrington, noted, “Occupancy drives value, and many buildings downtown are struggling to maintain that occupancy.” The pressing question now is whether this firesale portends a wider trend of distressed sales in the area.
Some may attribute the diminished office demand to the rise in remote and hybrid work models. But in Baltimore’s case, the situation seems to be a symptom of broader issues. The dwindling demand for office space in this area seems to reflect a vote of no confidence in the City Hall’s law and order enforcement, as progressive policies yield less than desirable results.
Luis Quintero, an economics professor at Johns Hopkins Carey Business School, warned that sustained vacancies and plummeting property values could lead to a massive reduction in property and income tax revenue for the city. Notably, high-profile tenants like T. Rowe Price and Pandora have already exited downtown Baltimore.
Looking beyond Baltimore, Goldman Sachs recently advised clients to brace for a potential 25% drop in office building values in other metro areas. This comes amidst rising concerns over the precarious position of commercial real estate and the office space market in particular.
To navigate this downturn, we suggest investors remain vigilant and closely monitor trends in both the broader CRE sector and the specific dynamics of local markets. We’ll keep you updated on the situation, providing insights to help you make informed decisions. Stay tuned.
Signing off, Peter Burke, Your Investing Pioneer.
