The worth of many office buildings in Washington, D.C., has fallen drastically, with some now valued no higher than the land they occupy.
As older commercial buildings have seen a drop in value, real estate experts assert that the pandemic-induced shift to remote work has compelled companies to downsize and consolidate into newer, more efficient spaces.
With many older buildings standing vacant, the prospects for redevelopment have taken a hit, leading to properties trading for prices far below earlier estimates by local real estate executives.
During Bisnow’s D.C. State of the Market event held at 600 13th St. NW, investors expressed a cautious optimism regarding market stability. Bernstein Management Corp. Senior Vice President of Investments Terra Weirich asserted, “I think we’re at the bottom.”
She explained, “When office values are closer to land value, even lower in some cases than what we thought land used to be worth, I think we’re at the bottom.”
However, Weirich cautioned that hitting the bottom doesn’t necessarily equate to an imminent bounce back in values.
“The question is, ‘How long are we going to stay here?'” she added, highlighting the absence of major catalysts for either significant rent growth or substantial cost reductions that would enable development to become economically viable again.
Recent sales from 2023 indicate that many older office buildings have been transacted for about a third of their previous sale prices, with some properties exchanging hands for as low as $150 per square foot, according to a Bisnow analysis conducted in January 2024.
Brokers revealed that certain buildings are listed at even more reduced levels, around $100 per square foot, with investors at the Bisnow event confirming that several sales have recently closed at that price point.
These figures are a stark contrast to 2019’s average of $406 per square foot for Class-B and Class-C office spaces in D.C., as reported by Newmark.
Given the limited demand for utilizing older office buildings in their current states, their value is increasingly linked to their locations and potential for repurposing or renovations to cater to higher-end office spaces.
Yet, navigating the financial complexities of such repositioning deals remains challenging. To illustrate, PRP Real Estate Investment Management Chief Investment Officer Jon McAvoy presented a hypothetical office repositioning case.
He posited that if a buyer acquires an outdated office building for $100 per square foot and embarks on renovation, construction costs could soar to $300 per square foot, a figure corroborated by other speakers. In seeking a return for investors of at least $100 per square foot upon selling the renovated asset, the property would require a minimum exit price of $500 per square foot.
The troubling aspect, McAvoy pointed out, is that the D.C. office market has not been robust enough to sustain such an exit price.
“We’re not seeing the light at the end of the tunnel on that just yet,” he remarked.
According to McAvoy, viable solutions hinge on broader economic factors such as business expansion, population growth, and job increases.
Although the premier segment of the office market has tightened, demand has arisen from major law firms in search of developers to raze buildings and erect new office spaces tailored to their needs.
However, McAvoy highlighted that the steep construction costs for new office buildings present a significant hurdle.
“There’s not enough trophy, and folks can’t afford to build more because it costs $1K per square foot or more to build something to put a law firm into,” he stated, emphasizing the structural challenges facing the market.
In light of the significant price drops, McAvoy suggested that the city consider acquiring some of the obsolete office properties for public service uses.
He noted the recurrent complaints about insufficient schools, poor educational facilities, and lack of recreational spaces for youth sports, arguing that now is a prime opportunity for the city to reclaim land for constructive purposes.
“I would love to see that happen,” he said.
Similarly, Hines Senior Managing Director Andrew McGeorge proposed that demolishing buildings could pave the way for more open, green spaces within downtown areas.
“There are going to be the groups that do the conversions, or it could be a really nice park,” McGeorge suggested.
Regardless of whether public sector interests or private developers lead the way, panelists agreed that the current climate might present a favorable window for engagement.
“This is an opportunity,” Tishman Speyer Managing Director Dan Dooley declared.
He added that bouncing off this $100-per-square-foot land basis could render residential projects viable, warning that this opportunity may not last long.
Meanwhile, Joe Coleman, a senior vice president at CBRE who specializes in D.C. office leasing, noted that a rebound seems plausible due to the substantial slowdown in new office developments.
Coleman stated, “We’ve stopped digging. We have a very limited supply of deliveries with development stopping, so that’s setting the stage for a rebound.”
As the D.C. real estate market navigates these transformative challenges, stakeholders remain cautious yet hopeful for a shift that revitalizes and repurposes the space effectively.
image source from：https://www.bisnow.com/washington-dc/news/office/investors-say-dc-office-values-have-hit-bottom-but-when-will-they-rise-129707
