Is The Office Tower Market Imploding?

The office tower market in various major U.S. cities is experiencing a significant decline, leaving investors and real estate experts bewildered. The recent sales of office properties in Chicago, Boston, Portland, and Dallas have raised serious concerns about the future of the commercial real estate market.

This comes after San Francisco saw huge devaluation among its commercial real estate spaces, highlighted by shopping mall operator Westfield deciding to give up its prestigious mall in June following a closure announcement by Nordstrom.

Chicago

The trend extends across the country. Chicago’s real estate office market is in turmoil, with a recent sale of a major office tower sending shockwaves through the industry. The 623,000-square-foot building at 230 West Monroe Street was sold for a mere $45 million, translating to a startlingly low price of approximately $72 per square foot.

What makes this sale even more astonishing is the fact that the same property was purchased for $122 million back in 2014, representing a staggering 65% discount. Experts suggest that the actual discount might be even more significant when considering pre-pandemic market values.

To add to the astonishment, the sale price is only half of the $87.7 million loan provided by Morgan Stanley to the seller in 2019 as part of a refinancing deal. This decline in value highlights the challenges that Chicago’s office market is currently facing, including remote work trends, layoffs, and an abundance of available sublease spaces. Rising interest rates and a tight lending climate have further compounded the struggles of landlords, resulting in a surge in office vacancy rates in the city.

However, the sale of 230 West Monroe does provide a glimmer of hope, as it marks the first time a large Loop-area office property has changed hands in over a year.

Portland

Portland’s office market is also in a bad spot, with the sale of the American Bank Building near the courthouse raising concerns. Menashe Properties purchased the 183,735-square-foot building for $13.6 million, which equates to a shockingly low price of approximately $75 per square foot. The property had previously sold for $45.1 million in 2014, reflecting a 70% decrease in value, possibly even steeper when compared to pre-pandemic highs.

The high office vacancies in Portland, exacerbated by remote work trends and concerns about safety downtown, have created an environment of uncertainty. The pandemic’s impact on the office market has led many investors to give up on downtown office buildings, increasing foreclosures and lender takeovers.

“Our purchase of the iconic American Bank Building represents a strategic, synergistic investment that not only underscores our commitment to downtown Portland, but also our confidence in the resurgence of the office space sector,” said Lauren Menashe, a principal at family-owned Menashe Properties.

Boston

In Boston, a pair of office buildings recently sold for approximately 75% less than their previous sale price. The buildings, known as 33-41 West, were sold for a mere $4.1 million, seven years after being purchased for $16 million.

The widespread decline in office property values has left experts grappling for solutions to fill these empty spaces. Many investors believe that this market downturn is still in its early stages, with no clear signs of a recovery on the horizon.

Dallas

The troubles in the U.S. office market extend to Dallas, where a major corporate campus anchored by State Farm Insurance was recently sold for $580 million. This represents a substantial $242 million discount compared to its last sale just seven years ago. Despite long-term leases with State Farm Insurance, the property’s value has plummeted, raising concerns about the overall stability of the U.S. office market.

The sale of the CityLine office tower complex is one of the largest U.S. property trades of 2023.

In addition to the four office structures, the transaction encompassed 120,000 square feet of retail area and a 42,000-square-foot medical office facility.

The significant value destruction witnessed in U.S. office markets has raised doubts about the future of commercial real estate. The declining demand for office spaces, exacerbated by remote work trends and economic uncertainties, has left investors and property owners facing an uphill battle to revive this beleaguered sector.

Recently, the White House launched a multi-agency initiative aimed at repurposing vacant office buildings into affordable housing. The program leverages the availability of $35 billion in low-cost loans from the Transportation Department to support housing projects near transportation hubs. This effort aligns with the Biden administration’s clean-energy agenda.

The initiative also introduces additional funding sources, tax incentives, and offers guidance on accessing 20 federal programs to aid real-estate developers in the often complex and costly process of converting office spaces into housing. 


Information for this briefing was found via The Real Deal, Williamette Week, Bisnow, The Dallas Morning News, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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