European family offices are taking advantage of falling US real estate prices, seeking opportunities in prime office spaces and «trophy assets» despite market instability.
US office property valuations have dropped sharply due to rising borrowing costs and the shift towards remote work. Modern buildings continue to attract tenants with robust rental rates, while older buildings struggle with high vacancy rates, destabilising the US office building sector.
For European family offices with significant real estate holdings at home, the US market offers a chance to diversify and deploy capital. European families are snapping up prime properties at substantial discounts, positioning themselves for potential long-term gains when the market stabilises.
“There’s genuine and growing interest in US real estate across family offices from Europe and the Middle East, more than I’ve seen in certainly - probably in the 20 odd years I’ve been working here,” says Darren Allaway, Head of Goldman Sachs Apex in EMEA.
Landmark buildings
Family offices are particularly targeting landmark buildings with iconic addresses in major cities.
“Clients appear much more focused on these opportunities (as trophies) than high-quality assets in second-tier cities. While valuations are always considered, trophy assets are often seen as more than a solely financial asset and more of a prized family heirloom, to be owned for generations,” Allaway told InvestmentOfficer.com.
Challenging market
This renewed interest comes as the US commercial real estate market grapples with rising interest rates and economic uncertainty. For the past two years, the market has been at a standstill, with owners reluctant to sell at low prices. However, the pressure to offload assets is increasing.
Recent sales highlight the falling values in commercial real estate. The ten-storey structure at 321 West 44th Street in Manhattan’s Hell’s Kitchen neighbourhood, initially purchased for 153 million dollars in 2018, was sold for less than 50 million dollars. A 67 percent discount. 1740 Broadway, an office tower near Columbus Circle, was sold for 185 million dollars, a significant drop from the 605 million dollars Blackstone paid a decade ago.
Earlier this year, Zara’s billionaire founder Amancio Ortega took advantage of the downturn to purchase assets at discounted prices. Pontegadea, Ortega’s family office valued at over 90 billion euro, announced acquisitions worth 1.1 billion euro in the past year, covering logistics, office, and residential properties in North America and Europe.
Facing looming debt maturities and rising costs, more property owners are being forced to cut their losses and sell assets. However, the reluctance to sell at a discount has led to a significant decline in transactions across the US commercial real estate market.
Transaction volume dried up across CRE
Forced sales uncommon
Forced sales have so far been uncommon, according to MSCI Real Assets. Only 3.5 percent of all office deals in the US involved distressed sellers in 2023, much less than during the global financial crisis.
Delinquency rates on commercial mortgage-backed securities have also increased, indicating potential distress. CRE debt maturities are significant in 2024, with 929 billion dollars of US commercial mortgage loans maturing.
According to Goldman Sachs the CRE debt maturity wall looks “manageable”, although the US Regional banks team of the Wall Street giant highlights that mainly US Offices as a key area of risk.
As of 17 June 2024, the broad MSCI US REIT Index, a leading indicator for real estate as a whole, posted a year-to-date total return of -1.79 percent, contributing to a three-year total return of -0.76 percent. According to McKinsey, closed-end funds generated a pooled net IRR of -3.5 percent in the first nine months of 2023, losing money for the first time since the global financial crisis.
Just the beginning
Some industry analysts caution that current bargain hunting is just the beginning, more a sign of quick deal-making than an indication that office building prices have hit rock bottom.
“The real wave of distress is just starting for lenders to everything from malls to offices,” John Murray, Pimco’s head of global private commercial real estate team, told Bloomberg in an interview earlier this month. Murray referred to recent regional bank failures in the US caused by an overconcentration of troubled commercial real estate loans.
“As stressed loans grow due to maturities, we expect that banks will start selling these more challenged loans to reduce their troubled loan exposures,” he said, adding his team has been buying the loans offloaded by some large US banks for the past 18 months.