While many investors are shying away from the office sector, Carlyle Group co-Chair David Rubenstein sees the market's distress as a prime buying opportunity.
"I would say the best single investment that I know of today is probably going to be commercial real estate debt in downtown office buildings, buying it from the banks when the banks want to get it off their books," Rubenstein said Tuesday at Bisnow's D.C. State of the Market event, held at the Omni Shoreham Hotel.
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As older office buildings lose tenants to newer properties and as those who are staying shrink their footprints and negotiate cheaper rents, Rubenstein said office buildings are seeing their values plunge. These trends are being exacerbated by high interest rates, which are also depressing values across commercial real estate.
"You're ultimately going to see the value of these buildings go down," he said. "I wish that wasn't the case. I wish it wasn't the case at all because I have a lot of investments myself in offices."
Carlyle Group had $370B under management as of the end of 2022, with $72B in available capital. Rubenstein, a billionaire investor who served in President Jimmy Carter's administration before co-founding D.C.-based Carlyle Group in 1987, is also the largest backer of real estate investment firm Declaration Partners.
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In May, New York University and Columbia University researchers published a study that estimated the average value of a New York City office building would drop 43.9% from 2019 to 2029. A report released by Capital Economics this week projected a 35% decline in nationwide office values by the end of 2025, and it said values are unlikely to recover by 2040.
As a result of the market's issues, many owners don’t want to put more money into struggling properties, but banks also may be hesitant to take the properties back and have the asset on their books.
“Most developers or owners of real estate in downtown office buildings are going to play a game of chicken,” Rubenstein said.
And by the time the keys for the value-stripped properties are eventually handed back to the banks, Rubenstein said the buildings will "be at a bigger discount than anything we’ve seen since the Great Recession."
“That's going to be a great business,” he said.
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