The difference between those who made money or lost money on the sale of their office properties in 2023 often came down to when they bought it.
CoStar reviewed sale comparables for the largest 100 individual office building sales in 2023 for which CoStar had a previous individual property sale price. Collectively, those 100 properties sold for $827.1 million less than their previous purchase price. Exactly half of the 100 sales showed losses.
The net loss from the previous purchase prices averaged $42.63 per square foot, or 15%. The difference between who took gains and who took losses often was dependent on how soon after the Great Recession — which ran from December 2007 to June 2009 — they had purchased their properties. The earliest buyers typically came out on top.
The Great Recession was largely the result of a property bubble fueled by easy credit. When the bubble popped and prices returned to earth, investors swooped in and were able to get properties for lower prices, sometimes at great bargains. That made it easier to reap gains as the economy recovered.
The 2023 sales data offers a window into the state of the office market going into 2024. The office sector's challenges continue to be pronounced, with increasing vacancies, heightened tenant improvement costs and waning rent growth tempering investor interest.
Initial estimates of office transaction volume in 2023 suggest that a little more than $53 billion traded hands last year, a level reminiscent of 2010 in the immediate aftermath of the global financial crisis.
“Amongst those 100 sales that are noted, some losers are likely victims of bad timing and bad luck — meaning that the owner executed well at the property level but simply got hurt due to post-Covid workplace changes and interest rate moves that made refinancing or exit next to impossible in 2023,” Michael Lirtzman, head of office agency leasing, U.S. for Colliers, told CoStar News in an email. “But there were also plenty of those sales that were certainly a result of poor performance pre-pandemic. And some of those assets would have been problematic to recapitalize or sell in any market window.”
At the same time, overall office property performance deteriorated last year. The trend of shrinking office occupancy that began at the pandemic’s outbreak in 2020 solidified in 2023. Average workplace attendance stabilized somewhere around 60% of pre-pandemic levels, according to an analysis by Phil Mobley, CoStar's national director of office analytics.
Over the past four years, office occupiers have begun adjusting their space requirements to accommodate new, post-pandemic workplace occupancy patterns. So far, they have given back over 180 million square feet, according to Mobley. This negative absorption, or a net change in occupancy where more space is vacated than occupied, has surpassed the total amount of net move-outs that occurred during the great financial crisis.
The office occupancy losses have been broad and deep. Nationally, the cumulative loss in occupancy has been nearly 3%, according to Mobley.
If the pattern holds in 2024, further occupancy losses are in store, Mobley said. This seems a likely outcome, especially since nearly half of office leases executed before 2020 are yet to expire. CoStar’s current forecast calls for more than 100 million additional square feet of negative absorption in 2024. This would be the largest single-year amount of negative absorption on record.
That peaking of the negative trends sets up the eventual potential for value-add and opportunistic acquisitions much like what was seen after 2008-2009, according to Colliers’ Lirtzman.
Of the 100 properties sold in 2023 analyzed by CoStar, 50 showed sales prices higher than their previous purchase price. The average month and year of those previous purchases for the gainers was May 2012. The average gain was $150.44 per square foot.
“It makes perfect sense that gainers were roughly 2012 vintage acquisitions as that window of time was on a valuation upswing as part of the post-2008 recovery,” Lirtzman said. “Valuations plummeted 2008-2010, and 2012 was in the heart of the office recovery. Upon acquisition, buyers were inheriting lower occupancies, cyclically lower rents, and true ability to create value through operations and investment in the asset.”
Some states do not require disclosure of real estate sale prices, so getting a complete picture of transaction trends can be difficult. But CoStar was able to capture a healthy sample of big deals from so-called nondisclosure states as part of its analysis.
The office properties that traded with a sizable gain in 2023 had a few key similarities that drove their price increases, according to Chad Littell, CoStar's national director of U.S. capital markets analytics. The appreciating assets, compared to their prior sales, generally fell into one of the following categories: owner/user sales; assets that hadn’t traded for 20 or 30 years; vacant buildings that were repositioned and stabilized; or office buildings that were converted into medical uses.
“For the most part, unless a traditional multi-tenant office property was acquired in the early years coming out of the great financial crisis, from 2010 to 2013, we haven’t seen widespread appreciation when considering prices that closed last year,” Littell said. “In fact, we’re seeing value deterioration compared to prior sales for many assets that were acquired during the last six to eight years.”
Of the 50 sales that were lower than their previous acquisition price, the average month and year they were originally purchased was January 2016, according to CoStar analysis. The average loss was $139.12 per square foot.
“By 2016, the recovery was very mature, institutions were extremely active in major markets, cap rates began to compress, and interest rates were nearing historical lows. Value-add opportunities were becoming harder to come by,” Colliers’ Lirtzman said. “Rents had already grown, and occupancies were higher, allowing for less organic net operating income creation.”
Of the 100 sales analyzed, buildings larger than 200,000 square feet collectively lost $990.2 million. Everything smaller gained $163.1 million.
“Many institutions and larger private buyers had a ‘bigger is better’ strategy on the buy side, hence the losses skewed to assets over 200,000 square feet,” Lirtzman said. “This is not entirely dissimilar to some earlier cycles.”
Those similarities are what sets up the market for a possible repeat of those buying cycles, according to Lirtzman.
“Greater value is generally created earlier in the cycle, buying assets with depressed net operating income, with room to recover as the cycle allows,” he said. “Relying on underwritten cap rate compression to create value on an already stabilized asset is a risky strategy for long-term value creation if macroeconomic fundamentals do not cooperate.”