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Fire Sales On The Rise As Office Owners Read The Writing On The Wall

After months of hoping for a better outcome, more office owners are cutting their losses and offloading distressed properties at bargain basement prices.

Landlords are taking major losses on buildings across the country, with some properties trading at as much as 80% below previous valuations, according to The Wall Street Journal. The trend follows months of rising vacancies and depressed rent growth, made more severe by rising interest rates that challenge refinancing.

The Griffin Towers in Santa Ana, California

Agave Holdings, the real estate arm of the parent company that owns Jose Cuervo tequila, in late April acquired a foreclosed office property in downtown Chicago for nearly $60M below its 2017 purchase price. Blackstone recently took a $47M loss on Griffin Towers in Santa Ana, California.

The question of whether borrowers would be able to find a solution for troubled office loans has been batted around for months, but as more owners see the writing on the wall, listings are up and the volume of sales has begun to rise. 

Commercial property auctioneer Ten-X listed 91 office properties in the first quarter, an increase of 44% year-over-year, per the WSJ. In the first week of May alone, 11 office properties sold at auction. 

On average, buildings were sold at 31% below the seller’s initial expectations, whereas one year prior, sellers accepted an average discount of about 7%, Ten-X said.

The fire-sale trend is expected to continue in the coming months as billions of dollars of office-backed mortgages come due. The delinquency rate for office loans landed at 2.77% in April, the highest rate since August 2019, Trepp data shows. 

For some, trouble in the market presents an opportunity. Funds targeting distressed office assets have popped up in markets like Dallas-Fort Worth, and experts predict sales at marked-down prices could be good for competition, allowing landlords to charge less than their neighbors by paying below-replacement costs. 

“We have learned from the past, that when everyone is selling, buy; and when everyone is buying, sell,” Jose Perez, managing director of Agave Holdings, told the WSJ.