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Has the office market hit rock bottom yet?
TRD’s Deconstruct podcast on signs that Chicago and LA offices hit historic low
The office market is struggling across the country. But some markets may have found their bottoms faster than others.
In Chicago and Los Angeles, some recent deals suggest that office values have finally hit a point where investors are ready to pounce.
“We’re starting to see investors get comfortable enough with the numbers to make some bids on these discounted buildings,” said Sam Lounsberry, TRD’s Chicago bureau chief.
The same can’t be said for San Francisco, where brokers and buyers have remained wary.
TRD’s Deconstruct podcast looked at the three cities to determine where they are on their quest for the basement.
Chicago
In Chicago, a January deal involving an aging office building in the West Loop neighborhood has been the clearest sign of a bottom.
The building was appraised at $38 million when it sold in 2012, coming out to over $160 per square foot. When it traded earlier this year, it went for just $4 million, less than $17 per square foot.
The building is just 50 percent occupied. But, at such a low cost, Chicago investors have been willing to contend with the high vacancies and low rents.
Most other major office deals have not seen such steep discounts. But many are selling for less than half their prior deals. Weeks after the West Loop deal, Chicago-based R2 paid $60 million for 150 North Michigan Avenue, which traded for $121 million in 2017.
Even as distress buyers swoop in, they’re still demanding certain qualities of their investments. The latest sales have shown that buyers will take a risk on an aging asset if the location is right.
“There is certainly opportunity in Chicago,” Lounsberry said. “People are willing to place bets on the office market here.”
Los Angeles
For the last few years, Los Angeles’ office market was so stagnant that finding the bottom seemed all but impossible. But a flurry of recent sales has changed investor sentiments around the city.
Like in Chicago, the recent L.A. deals have all been at a 50 to 60 percent discount from what they last sold for. The price per square foot numbers have typically gone as low as $130 per square foot, though that price floor can vary greatly from one sub-market to the next.
“It’s not like we’ve hit the bottom and now we’re headed back up.”
One market that is far from the nadir is Century City, where office properties have been so healthy that owners are refusing to sell.
“Century City is seeing historic lows in vacancy. People love to be there. Office leases are being signed almost every day,” said TRD’s West Coast bureau chief Isabella Farr.
On the opposite end of the spectrum, Downtown L.A. has become a graveyard for Class A offices. In December, Shorenstein sold a Downtown L.A. tower to Carolwood for $147.8 million, or about $134 a square foot. Some industry insiders have cautioned buyers that towers in the neighborhood will never return to healthy occupancy levels, Farr said.
San Francisco
Unlike Chicago and Los Angeles, San Francisco has yet to show real signs of reaching the bottom.
The city is heavily reliant on the tech industry, which has raised concerns among investors. Layoffs in the tech sector have hurt office demand, leaving the availability rate at 36 percent. Investor interest has waned, leading to a significant decrease in investment sales.
Despite substantial price reductions, uncertainty prevails in San Francisco, as the market awaits more sales data to gauge its true bottom. In the meantime, investors have been hesitant to commit to the city.
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Even as signs of the basement have emerged in Los Angeles and Chicago, investors have remained cautious. Only time will tell when these markets will fully recover from their current downturns, and a true turnaround could be years away.
“It’s not like we’ve hit the bottom and now we’re headed back up,” Farr said. “It doesn’t necessarily mean that the office market is going to recover any time soon.”