Opportunities for Distressed Office Buildings
Thursday, March 12th, 2009CoStar.com is reporting that Opportunities Mount for Distressed Office Buildings, But Few Are Trading.
According to the report there are currently 19,600 office buildings with vacancy ranging from 60-100% of the office space. According to the chart compiled by CoStar San Francisco has 125 buildings in this category and the Oakland/East Bay has 208 buildings.
The article also reports few if any sales of these distressed assets.
The reasons for the dearth of deals appear to come down to three primary factors: the pricing disconnect that exists due to rapidly declining market fundamentals, tightened credit conditions, and a lack of appetite for risk on the part of [both] lenders and investors.
A Matter of Perspective
The answer CoStar provides is exactly correct and comes down to a matter of perspective.
Sellers tend to be optimistic about the future value of assets and buyers tend to be pessimistic or at least realistic. Sellers foresee rental rates rising and demand picking up for commercial office properties. This perspective motivates sellers to hang on to the property until a buyer who recognizes the “true value” of their property or they are forced to sell through foreclosure.
Buyers realize that though the seller may expect rents to increase, there is no guarantee that this will actually happen. Buyers want to pay a price based on actual rents, if not decreased rental rates due to the over abundance of office space. Buyers with this perspective will hold out until they can buy a property that meets their criteria.
Leverage Has Left the Building
A lot of the value attributed to office buildings in the past five years was a product of the ability of buyers to leverage the properties to such a degree that even a slight increase in rents or occupancy gave a nice bump to their rates of return.
With 80-90% loan to value leverage, unavailable buyers need to have a greater upside in relation to the purchase price to get a compensating return commensurate to the risk they are taking on.
A Staring Match
It has become a staring match of sorts. Neither side wants to show weakness and neither side is ready to admit defeat.
Until one side concedes defeat, the staring will continue and properties will remain unsold.
Who will blink first? Will it be they buyers or the sellers?
