The U.S. Office Debt Opportunity: Why Now?

The U.S. Office Debt Opportunity: Why Now?

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The U.S. Office Debt Opportunity: Why Now?

While deal-by-deal underwriting and conditions relative to pricing and cash flow differ, at an overall market level pricing declined in the office sector to the point that any further distress is likely already priced in. In fact, values have fallen in a correlated fashion together with transaction volumes since 2022. Meanwhile transaction volumes, if measured using the value of trades, have stabilized.

If we strip value out of the equation by focusing on square feet traded (the physical volume), office trades have been picking up since the end of 2023 (see chart below). In our opinion, this brings us closer to the end of any further mark-downs to office valuations—and we could actually already be there.

U.S. Office Transaction Volume, Rolling Annual Totals

Sources: MSCI Real Capital Analytics and Hines Research. As of 2Q 2024. Using rolling annual sums for both value and SF traded since the market peak for NCREIF property appraised values in 2Q 2022. Showing values since recent trough to present.

Key Takeaway


We believe that debt investments at this point in the market cycle are likely being made in an environment of lower risk, amplifying the case for risk-adjusted return potential. We believe the opportunity is multi-pronged with several avenues all of which could offer compelling performance.

At the same time, loan-to-value for commercial real estate loans have been trending downward for some time. Average levels for “all property” have been at about 60%; for the office sector, between 50-55%. This landscape should be interesting for debt investors as opportunities unfold across three investment approaches.

Find out more about the approaches we believe have the potential to offer attractive performance.

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Disclaimer


The content herein and in the report is provided for informational purposes only. Nothing above or in the report constitutes investment, legal, or tax advice or recommendations. Such content should not be relied upon as a basis for making an investment decision and is not an offer of advisory services or an offer to invest in any product or asset class. It should not be assumed that any investment in an asset class described herein will be profitable. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice. Opinions or beliefs expressed in these materials may differ or be contrary to opinions expressed by others. Certain information above and in the report has been obtained from third-party sources. Hines has not independently verified such information.


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