Parsing Office Distress
In this AFIRE article, Dags Chen and Lincoln Janes lay out a framework for parsing upswell in distress across the office sector—and discuss how this is presenting a potential opportunity, especially for investors willing to brave the dislocation.
Without a framework that considers the causal factors underpinning the current office market dislocation, investors are left sifting through millions of square feet of office space in search of the right property.
The tide of investor sentiment has turned definitively against the office sector. Publicly traded office REIT share prices have fallen by 44% from March
2022 through December 2023, portending further declines for private valuations, which were down an estimated 30% over the same period.
While office utilization has slowly crept back up following the pandemic, it is still short of where it was prior to COVID. Office downturns can take years to play out, as the industry experienced during the late 1980s to early 1990s Savings and Loan Crisis (S&L). The GFC and dot-com downswings lasted slightly more than two years, and the current higher-for-longer dislocation has lasted almost two years.
However, in no prior downturn has office faced such an existential threat due to remote work. Additionally, there are few indications of a “bottom” to office values presently, and even once values stabilize, the prospective recovery would still be tenuous.
