How bad could the office-property market get in some cities?
Canadian pension funds have been among the world’s most prolific buyers of real estate, starting a revolution that inspired retirement plans around the globe to emulate them. Now the largest of them is taking steps to limit its exposure to the most-beleaguered property type — office buildings.
Canada Pension Plan Investment Board has done three deals at discounted prices, selling its interests in a pair of Vancouver towers, a business park in Southern California and a redevelopment project in Manhattan, with the New York stake offloaded for the eyebrow-raising price of just $1. The worry is those deals may set an example for other major investors seeking a way out of the turmoil too.
One dollar! Hopefully U.S., not Canadian.
To be fair, the purchaser of CPPIB’s (29 percent) stake also agreed to assume CPPIB’s share of the project’s debt (the building is being redeveloped), so the “real” purchase price was rather more than $1. Nevertheless it’s fair to assume CPPIB took quite a hit on the sale, which took place at the end of last year.
Bloomberg:
Around the same time, CPPIB sold its 45% stake in Santa Monica Business Park, which the fund also owned with Boston Properties, for $38 million. That’s a discount of almost 75% to what CPPIB paid for its share of the property in 2018.
It’s interesting to read that CPPIB bought its stake in the New York building in 2021, perhaps seeing a bounce-back in office property as Covid faded. Obviously that has not worked out.
The continuing weakness in the office-property sector raises a lot of ugly questions, one of the ugliest of which concerns the exposure of banks that have lent to owners of buildings on the basis of valuations that are no longer remotely connected with reality.
Since the Covid-19 pandemic upended the use of real estate around the world, lenders have had little incentive to get tough on borrowers squeezed by soaring interest rates and take on loans that had lost value. Transactions ground to a halt as potential sellers were unwilling to unload buildings at distressed prices — an outcome that allowed them to pretend that nothing had fundamentally changed.
For many, the time to wait it out is nearing its end.
Across the country, deals are starting to pick up, revealing just how far real estate prices have fallen.
And not all those sales will be voluntary, as landlords squeezed by falling rent rolls and (when their existing borrowings mature) rising interest rates feel that they have no alternative other than to throw in the towel. Those sales will almost certainly depress prices still further.
Bloomberg (February 13):
More than $1 trillion in commercial real estate loans are set to mature by the end of next year, according to data firm Trepp.