We’re observing a handful of office assets trade in 2024, with many showing significant discounts to their recent peak valuations and previous sale prices. It appears that the market is experiencing an uptick in sales activity from 2023 when office sales plummeted to levels not seen since the pandemic. We're also seeing this reflected in MSCI Real Capital Analytics data.1
Case in point: The recent sale of a two-building Class A office campus—1000 and 1100 Dexter—in Lake Union, Seattle. According to CoStar, at 66% leased, the project was sold in 2004 for $63.9 million and recently for $47.5 million in 2024, which reset its value to a 26% discount to its price from 20 years ago. The Lake Union area is commonly known for its tech and life science presence, but many sources, including CoStar show a retreat from major players such as Amazon and Meta lately.2
Even some office properties generally considered to be in the most desirable locations in the nation are seeing heavy markdowns.
Market Square in Washington, D.C., which CoStar shows sold for a record-breaking $905 per square foot back in 2011, just changed hands from the real estate giant Blackstone in 2024 at roughly half the price of its previous sale—$464 per square foot.3 While I’ve seen larger discounts on Class B commoditized office buildings, a roughly 49% discount for this project is more notable to us, considering it is a Class A project, located on Pennsylvania Ave NW, nearly equidistant from the White House and Capitol Building, and 83% occupied3 according to CoStar, by tenants whose business is mostly conducted in person - this stands out as a compelling basis reset to me and therefore an interesting entry point.
Despite the emergence of heavily discounted trades, it would be an oversimplification to imply that the office market is generally a good buy today. Among others, factors such as stabilized occupancy—a project's long-term average occupancy rate— remain subject to debate and add to the challenges of underwriting deals.
We have observed that securing loans for many office projects remains relatively difficult likely due to the perceived risk for the sector, including pre-pandemic leases that continue to expire with no reliable projection of future demand. The existing data we’re observing is relatively grim, further complicating investment decisions in this sector. For example, CoStar predicts a drop in average occupancy for office projects in the coming years.
Bottom Line: Ignorance isn’t bliss in the case of office real estate—more price discovery will likely continue to reduce bid-ask spreads which may gradually lead to a new floor for office pricing.
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Footnotes:
1. US Big Picture - 2023, MSCI Real Capital Analytics, 2024.
2. South Lake Union Submarket Report, CoStar, April 2024.
3. Sales Data, CoStar, April 2024.