The U.S. office property market has been hard hit since the pandemic by higher interest rates and as many office workers worked from home. Prices for office buildings have fallen 12.4% year-over-year as of the second quarter, according to the RCA Commercial Property Price Index, causing speculation about when a bottom in the market would be reached.

"Peak distress is fully behind us," said Stephen Buschbom, research director at industry research firm Trepp, who added that what was now key is to have more deals struck to give the industry an idea on price.

"We still have price discovery left," Buschbom said. "An increase in transaction volume will mean that’s becoming more palatable for those holders."

Throughout 2023 and the start of 2024, many developers and lenders chose to extend maturing loans with new terms or held off a sale to avoid recording a big loss.

Office sales averaged $35 billion per quarter pre-COVID-19 but as property valuations dipped on continued vacancies and high operating costs, they have averaged only $13.4 billion per quarter since 2023, according to data from MSCI Real Capital Analytics.

However, some analysts have seen signs of a pickup in sales of stressed properties, which has led some to think there is a turning point in the market.

"There are growing signs of market-bottom capitulation or sophisticated property owners selling their properties even at large discounts to their purchase price which is helping create some sort of pricing benchmark for office values," said Kevin Fagan, Moody's head of Commercial Real Estate Economic Analysis.

Since the end of the first quarter in the U.S., there were seven office properties sold at a discount of more than $100 million compared to just one in the first quarter and just two in the whole of 2023, Moody's said in an August report which was based on public records data.

The list of sales included a Midtown Manhattan office building - 135 West 50th Street - that sold for a 97% discount to its original price of $285 million for a $276.5 million loss, according to Moody's, which also listed office sales in Chicago, Seattle and Washington, D.C.

Another example Moody's listed is 1740 Broadway, which sold at a $416 million loss compared to its previous purchase price. Investors made losses on AAA-rated bonds sold against it, for the first time since 2008.

Yellowstone Real Estate Investments, which bought 1740 Broadway, did not return a request for comment. UBS, which sold the 135 West 50th Street loan, and JLL, which brokered the sale of both properties, declined to comment.

LOWER RATES BOOST

With a lack of a pricing benchmark, property owners have been reluctant to sell because lower transaction volumes created a mismatch in pricing expectations. They have instead chosen to extend or refinance existing loans to tide over to a period when interest rates are being cut and improve their ability to retain these properties.

The real estate industry has suffered from a double whammy of low vacancies and revenues, which have made it difficult for property owners to make interest payments on existing loans.

Even with rate cuts, borrowers with nearly 72% of some $19 billion of maturing loans over the next 12 months, could struggle to refinance because they may need to come up with an average 30-35% of equity to get a takeout loan, said the Moody's study.

"There will be some large balances (in the general market) towards the end of this year and into early next year that go through a sales transaction," said Ryan Reiss, chief lending officer at D.C. regional lender EagleBank.

The Federal Reserve recently reversed the direction of U.S. interest rates for the first time since 2022 with a 50 basis point cut in September and promised more.

But while the 50 basis point cut could show "light at the end of a very long tunnel" the "(commercial real estate) market revival would need at least 300-400 basis points in interest rate cuts to compensate for the sharp decline in property valuations," said Alex Horn, founder of private lender Bridgeinvest.

One recent example of a lender pushing forward was Parkview Financial which offered to sell $300 million of seven multifamily and office loans - a mix of performing and some in litigation - in New York, New Jersey and Connecticut in an auction, according to Parkview CEO Paul Rahimian and a confidential offering memorandum seen by Reuters.

Rahimian said his firm received multiple bids at 95-98 cents to the dollar for four of those loans, which it plans to close over the next six weeks. Three loans were on hold, he said. The firm plans to use the proceeds from the sales to hand out new loans, Rahimian said.

Such sales were creating opportunities, said Keerthi Raghavan, head of ABS strategy at Waterfall Asset Management, which has invested nearly $2 billion over the last year in bonds and loans sold at steep discounts.

"Fundamental issues are not something that will disappear overnight in our view with front-end rates being lower, and there (are) still plenty of CRE assets sitting on balance sheets that need to be sold or resolved, which should keep supply elevated," he said.