The mounting challenges plaguing the domestic office market have led some lenders and investors to sit on the sidelines. In the rare instances when new office loans are issued, it's often for buildings that meet certain criteria and from lenders willing to take on the risk.
One private equity firm shows what can be involved in that type of financing.
Northwind Group, a New York-based real estate investment firm, is open to deals as a small company while some larger institutions and banks remain hesitant. The company recently issued a $65 million loan for the construction of a luxury tower along the Jersey City, New Jersey, waterfront. This is part of a bet that it can be built in the right location, at the right price, in the right location, and with the right tenant. If depressed demand eventually recovers, we will be at the forefront of an office market recovery.
The first mortgage, the Senior Acquisition Loan, helped finance the 601W Cos.acquisition of Harborside 5, The more than 977,200-square-foot office tower was only 35% leased at the time of the deal in February.New York-based investment company Contract sales price The price tag is $85 million, just a fraction of the 33-story building's book value of $118 million, according to a Trust Securities memo.
Ran Eliasaf, founder and managing partner of Northwind, said that even though the deck appears to be stacked against other office properties in the area, relatively low acquisition costs and increased interest from prospective tenants mean Harborside 5's strong fundamentals support this risk.
“Decisions to finance real estate are made on a case-by-case basis; [601W] “It's cheaper than the cost of the land, it's fully developed and has positive cash flow. It's a good business plan with the sponsors we've been working with,” he said. The overall office market is currently in a dire situation, but it will eventually find equilibrium. ”
Since its founding in the wake of the Great Recession in 2008, Northwind has invested more than $3 billion in equity and debt across the nation's commercial real estate markets to help finance new developments, acquisitions, and a variety of other initiatives. I went. The company, which was bullish on office space until the coronavirus pandemic, invested in repositioning trophy properties in Manhattan. 100 Pearl Street and 305 West End Avenue — The past few years have not been very active as the market has stabilized and we were waiting for the right time to re-enter.
Eliasaf said the office loan was the first in the past three years that Northwind was reluctant to issue. The company provided $45 million to finance the acquisition between 601W and seller Veris Residential, as well as remaining funds to fund upgrades, tenant finishing work and other plans to generate leasing activity.
According to Northwind, 601W is already in negotiations with prospective tenants, and if fully realized, the property's occupancy rate will increase to approximately 70%. However, given the amount of Northwind's investment, in theory it is enough for the building's occupancy to reach his 60% in order to make a profit on the sale.
“Most of the opportunities we've seen so far have been things we wouldn't want to do,” said Michael Einbinder, managing director of Northwind. Harborside has “strong rental momentum among tenants seeking high-quality products at attractive rents, and is located in Jersey City's best neighborhood. And in our fundamentals, you can hardly go wrong.”
For investors looking to buy, the combination of plummeting valuations and owners eager to sell distressed properties has created a series of deals at historically low prices that are hard to miss.
Valuations across the U.S. are plummeting due to flexible work trends, weak lease volumes, tight refinance terms, and high interest rates. Credit rating agency Fitch Ratings said in a recent report that the decline in office values could match or exceed the decline measured during the Great Recession, and prices have not yet bottomed out. he added.
Office values have fallen to nearly four-year lows, and recovery efforts are expected to far exceed the time it took the market to recover from the 2008 crash. According to CoStar analysis, average valuations have fallen by up to 15% since the end of 2021, with real estate for large institutional investors at about twice the rate of decline.
This decline equates to more than $664 billion in lost value in the domestic office market between 2019 and 2022, according to recently revised numbers detailed in a report published by New York University's Stern School of Management. .
Some office real estate experts say rising vacancy rates and falling rents are weighing on the market, a downward spiral that could continue until at least mid-2025.
But despite all this bad luck and gloom, more and more buyers and lenders are taking the plunge.
For example, Washington, D.C.-based PRP Real Estate Investments acquired the two-building Market Square complex on Pennsylvania Avenue earlier this month. For $323 million, Or approximately the same amount as the previous owner's loan balance. The deal was the largest in the area in nearly two years.
Northwind's Eliasaf said the decision to fund the Jersey City acquisition remains a wise move, even if the office market hasn't fully recovered.
“It's already zoned, so it can be easily converted into housing,” said the managing partner. “Of course, it won't happen right away, but it's always good to have a backup plan.”
