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Good afternoon — thanks for checking into DOMUS: we are the real estate newsletter, specially curated to provide you with the most important trends, news, deals, and more in practically no time. Today, we'd like to focus on a few cities throughout the U.S. and the continued distress they're enduring in their office property markets.

In Today's Email

• Pimco's Billion Dollar Default: the asset-management firm's zealous 2021 investments are now coming back to haunt it.

• America's Unique Workforce: and its propensity for a remote lifestyle.

• Significantly Discounted Sales: from San Francisco to Los Angeles.

• Plus: office property defaults in Manhattan, REIT update, and notable deals.

Pimco's Billion Dollar Default

Looking back to 2021, at a time with historically low interest rates, government stimulus checks, technology companies looking to hire, and an economy hoping to rebound on the surge of newly vaccinated workers, prospects for office properties were looking upwards. Accordingly, Pacific Investment Management Co. (Pimco) acquired Columbia Property Trust Inc. and its 19 office buildings in New York, San Francisco, Washington D.C., etc. for $3.9 billion.

Fast forward to today, and Columbia has now defaulted on over $1.7 billion of debt — one of the largest defaults during the pandemic period. This default along with others marks the latest sign that a meltdown is unfolding in the office market with the potential to upend one of the mainstay investments of the commercial property world.

The $113 billion worth of U.S. office building sales in 2022 was the lowest level since 2013 (not including 2020). 

Although Pimco's properties are leased to blue-chip tenants like Verizon, Snap, and Twitter, the rising interest rates combined with Pimco's choice of floating-rate loans have resulted in debt payments greater than its annual cash flow. At this time, Pimco's choices include giving up the buildings to creditors or somehow restructuring their debt. With America's offices still only filled at 50% of 2019 levels, it doesn't seem like these problems are likely to go anywhere, anytime soon.

America's Unique Workforce

Of course, it is no secret that Americans are reluctant to go back into the office (as outlined just a few sentences above) — but the extent to which Americans have refused to return to in-person work is not something the rest of the world is seeing.

While U.S. office occupancies currently stand at 40% to 60%, Europe and the Middle East are seeing rates of 70% to 90%. In Asia, return to office rates now stand at 80% to 110% (meaning that in some Asian cities, more people are now in the office than prior to the pandemic).

Some of the reasons for why this has happened include the fact that Americans tend to live in more spacious suburban homes that can accommodate at-home work in comparison to cities in Asia that have significantly smaller homes on average; Americans tend to have far more tedious commutes than with the European and Asian public-transport systems that are less prone to delays; and America is facing an incredible labor shortage with unemployment at just 3.4% compared to 6.1% in the EU.

Of course, it is quite obvious that these significant vacancies are causing chaos for office property landlords, but this new trend of remote-work has also caused many problems for city budgets that depend on property taxes as well as small businesses like restaurants, shops, etc. that rely on office workers as their primary customers.

Significantly Discounted Sales

LaSalle Investment Management has sold a 217,000-square-foot office building in Orange County for a 55% loss. In 2019, LaSalle bought the property for $55.4 million ($255 per square foot) and has now sold it for $24.9 million ($115 per square foot). With the property currently at a 57% vacancy rate, there is certainly plenty of reason for its destruction in value over the past four years.

The Apartment Investment and Management Company, or Aimco, has found a buyer willing to pay $167.5 million for its ParkMerced mezzanine loan that was originally valued at $275 million. The 152-acre apartment complex is owned by Maximus Real Estate Partners, who have been facing difficulties beginning construction despite a nearly $1.8 billion recapitalization in 2019.

Connecting the Dots

Clearly then, office properties are in a pretty bad place (at least for the time being): Americans are simply not returning to the office nearly as fast as was originally expected and, interestingly, all the empty space that now exists is creating a negative reinforcing cycle where Americans who are in the office are just sitting in big, empty spaces that tend to be quite depressing which just pushes them to want to stay at home even more.

Additionally, it is worth noting that many analysts, brokers, and investors agree that U.S. developers have built far too many office towers over the past few decades. Motivated by federal tax breaks, low interest rates, and inflated demand from unprofitable startups, developers have out-built demand by a significant margin.

So... what does this all mean?

Well, the only concrete answer is that nobody truly knows: some analysts estimate for office space demand to decrease as much as 20% from where they currently are in the years to come, and so building long-term models on office investments is still quite difficult to do. Yet what is worth looking into and analyzing further lies on the opportunistic side of things: if companies and businesses aren't renting these spaces, who will? What else can these building / spaces be used for? What incentives exist for government agencies and investors to do something about this mounting problem?

With so much turmoil surrounding us, it feels as though there has to be an incredible opportunity lying somewhere in the midst of all of this. If someone or something can find a way to utilize these vacancies in an innovative manner that is beneficial for the stakeholders currently feeling the pain, there is no doubt they'll be successful.

REITs Quick Update

Equinix (EQIX) has added five new long-term Power Purchase Agreements in Spain totaling 225 megawatts, thereby increasing its backing of renewable power projects significantly. The projects are expected to be operational in 2025 — and are expected to bring Equinix's contracted PPA capacity to 595 megawatts globally, generating ~2 million megawatt hours annually.

Deals of the Day

• Deal #1:

• 58 Murray Guard Dr, Jackson, TN | Asking $3,201,000 | 12,804 SQ FT

• Investment Triple Net Lease (Office / Medical)

• Built in 1982 | Five Year Sale NNN Leaseback

• NOI of $256,080 | Cap Rate of 8.0%

• Check out more information here

• Deal #2:

• 811 N Main St, Jamestown, NY | Asking $3,931,684 | 13,813 SQ FT

• Investment Triple Net Lease (Retail / Rite Aid)

• Built in 2003 | Less than a year remaining on current lease, but there are four more, five-year tenant renewal option periods remaining

• NOI of $324,364 | Cap Rate of 8.25%

• Check out more information here

• Deal #3:

• 4340 Maine Ave, Rochester, MN | Asking $10,057,000 | 63,425 SQ FT

• Investment Triple Net Lease (Retail / Publicly-Traded Marcus Corp.)

• Built in 2007 | Ten Years Remaining on Lease with Significant Rental Increases

• NOI of $804,580 | Cap Rate of 8.0%

• Check out more information here

That's All For Today

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This is not professional and / or financial advice, the information in this newsletter is provided for educational and informational purposes only.