Broker predicts turnaround for aging office buildings. Wait, what?

Everything you thought about Class B and C offices is wrong.  

That’s what one commercial broker says in a report that predicts a comeback this year for those properties. But it lacks something potentially important: data.

Tenants continued to fill buildings near major transportation hubs such as Penn Station and Grand Central early this year, as well as Class B and C buildings in prime Midtown locations, according to the report from Marcus & Millichap’s Eric Anton.

“The general consensus of buyers is that there will be increased transaction volume in the Class B and C segments starting in early summer,” Anton asserted.

The forecast, he said, is based on anecdotal evidence collected on the ground. According to the broker, more buyers are looking to take advantage of low prices and owners are more willing to negotiate as their mortgages come due.

Anton is currently negotiating the sale of an older office building in Midtown at around $250 a square foot, he said.

“Two years ago that would have been double,” he said. “We’re slowly but surely meeting in the middle. We’re getting multiple offers. They’re low but at least we’re getting offers, and the sellers are starting to say ‘OK.’”

Deal makers interviewed by The Real Deal described a window of opportunity as mortgages on older buildings come due and interest rates stabilize. Demand is growing for properties that can be converted to residential, they said, but only a small portion of them can.

“If you want to look for a bright spot in the spring, I would say the bright spot is this segment of the market that may be suitable for conversion,” said Compass broker Adelaide Polsinelli. “Those properties may have a chance.”

Potential buyers of those properties are starting to be more aggressive, but buildings are far from flying off the shelves. Polsinelli described one negotiation in the Financial District where a developer is exploring a ground lease on a property for a potential residential conversion. Discussions have been crawling along for six months.

“The market is definitely in a very transitional state,” she said. “The wave of foreclosures is actually real and it is happening, so when an owner is faced with losing a building to foreclosure or selling it at a discount, they’re going to choose the discount.”

Ilan Bracha of IB Global and The Bracha Team said he is getting more offers for B and C buildings, but “in order for them to trade, the numbers need to be very, very low.”

“The B and the C, I don’t see much room for it,” Bracha said. “The best 20 percent will do good, but then the rest of them, I think it’s very risky just to go in and buy just because the numbers may be low.”

Rod Kritsberg, head of investment strategies for KPG Funds, a firm that buys and upgrades class B and C buildings, predicted a rosier future for those properties in residential neighborhoods like Soho, Union Square and the West Village, but a bumpier road elsewhere.

“From our vantage point, probably 20 percent of the existing office stock needs to disappear, to just be something else, and that would help buoy the rest of the market,” he said.

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