A student in a recent class asked about foreclosures in the office building sector and whether such claims hold. The answer: it depends on the building and market. However, in most primary and secondary markets, office buildings face challenges.
One striking example is an office building transaction in Emeryville, California—a San Francisco Bay Area suburb. This case highlights some key dynamics in the current market:
The Transaction Details
The deal involved a banknote sale, not a foreclosure or resale. PNC Bank sold the note to a private investment firm.
The sale price was 68% below the loan amount, suggesting a ~80% discount from the last sale price.
Key Implications
Future Foreclosure and Underpricing
The buyer is expected to foreclose on the borrower, take ownership, and lease the building at significantly lower rents. Despite reduced rents, the property is projected to generate healthy net operating income (NOI), underpricing competitors in the market.
Attracting desirable tenants by undercutting the competition
A superior office setting at lower rents will attract top-quality tenants. A series of similar transactions would be needed to lower rents in that larger region. However, strong NOI from credit-quality tenants will immediately benefit the building’s investors.
Occupancy and Value-Add Opportunity
Currently, the building is 60% occupied, compared to a target of 90-95% for Class A office buildings, even post-COVID. This vacancy presents a near-term opportunity to increase occupancy, boost NOI, and significantly raise the property’s value.
Broader Market Context
While this is a story from the San Francisco East Bay, other markets tell different tales. Most U.S. office markets are in a hypersupply or recession phase, but cities like Indianapolis, Milwaukee, Orlando, and Tampa are in periods of expansion.
This transaction underscores how market conditions and strategic investments can vary widely across regions and properties, offering investors both challenges and opportunities.
About the author/planner/teacher
As the Founder and CEO of The Real Estate Whisperer™ Financial Planning, Rich Arzaga, CFP®, CCIM, is a flat-fee financial advisor who provides advice only. By focusing solely on delivering client-centered financial advice rather than managing investments, he ensures his undivided attention to his clients' needs.
Drawing on his extensive expertise, Rich provides valuable advice on various real estate topics, including buy-sell-hold strategies, tax-deferred and highly appreciated tax reduction strategies, real estate succession planning, and rental property cash flow analysis.
His exceptional knowledge and real estate strategies have earned him recognition in business and finance publications such as the Wall Street Journal, The New York Times, Newsweek, Kiplinger, and The Journal of Financial Planning. As an esteemed adjunct professor at UC Berkeley Personal Financial Planning programs, Rich has been Honored for his excellence in teaching.​
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