Question about Office RE valuations
Hello,
I've been looking to find the liquidation value of an office REIT, however there isn't very much comp information for RE sales in the areas the REIT is based in. Just as a sort of survey to see where the market is at right now, based on your personal experience, what sale prices are you seeing for Class A and B offices in the following cities?
- West Houston (specifically, Energy Corridor, Westchase if possible)
- North Dallas suburbs (Addison, Plano, etc...)
- Charlotte
- Denver
- Minneapolis
Thank you in advance!
It's gonna be pointless unless you go through each property
Office RE valuations are all over the place right now, especially in secondary markets where transaction volume is low. From what I’ve seen, Class A offices in stronger submarkets with good occupancy are still trading, but at steep discounts—often 20-40% below pre-2020 levels. Class B properties with high vacancy or weak leasing prospects are in even worse shape, sometimes going for land value or getting handed back to lenders.
For your specific cities, Energy Corridor and Westchase in Houston have seen some distressed sales, with cap rates pushing higher due to weak demand. North Dallas suburbs like Plano are holding up better because of corporate relocations, but weaker properties are still getting hit. Charlotte is a mixed bag—uptown offices are struggling, but suburban space is doing better. Denver and Minneapolis are both tough markets right now, with rising vacancies and landlords struggling to refinance.
If you’re trying to estimate liquidation value, you’ll probably need to apply aggressive cap rates and assume a long sales timeline. Might be worth reaching out to brokers for off-market data since comps are scarce.
Thanks for the very informative response! I'll see which brokers I can get into contact with.
You're welcome.
Sounds like you’re looking into $FSP? If so, there are only 14 assets to value as they continue to divest. Their reporting is fairly good, giving you avg rents and occupancies by property. You’ll need to make some assumptions on OPEX to try to value each one based on a capped NOI. I took a very conservative approach when I bought a couple years back on both cap rate and $/sf valuations. They had 20 properties when I initiated my position. So far, individual sales have generally been in-line with my estimates. We’ll see if the recent activists bring anything of value…
Thanks for your thoughtful response; it sounds like you know a lot about office CRE, and yes, FSP is one of the REITs I'm looking into.
I used a similar method to the one you described; 40% NOI margin, and an 8% assumed cap rate for properties with longer average lease terms or higher occupancy, and just assumed ~$90/sf for less "predictable" properties.
Just out of comparison, and if you're comfortable sharing, I'm curious what your $/sf assumptions were for the 3 cities?
On average, I'm at $175/sf. They're consistently averaging over $200/sf on their sales. When I initiated my position, the price implied $97/sf, which is absurd. People are paying that for shells to convert into other uses. These are Class A/B buildings with fairly decent occupancies considering what the office market just went through. Vacancy seems to have bottomed to me, and rents have remained flat or increased over this time. I initiated at an estimated 12% cap on existing income where the average occupancy is 70%. Any new lease revenue will drop almost entirely to the bottom line since most the OPEX is fixed. Replacement costs on these buildings have to be at least $300-400/sf in these markets. I don't develop in any of the markets, so I can't say with certainty, but it can't be less than that.
If the office buildings are in downtown Minneapolis, you are talking about pricing being in the single digits per square foot for actual transactions right now. Maybe there's a unique occupancy story (majority of NOI is a credit tenant on a long-term lease) that helps the valuation, but it is a literal bloodbath downtown right now. I've heard Denver is a similar story, but submarkets like Cherry Creek are doing relatively well.
I don't know the other three as well.
Interesting. For the Minneapolis properties being sold at single digits, are these average-occupancy (~60-70%) or does this only apply to highly-distressed properties?
Both, but the really bad trades are with a lot of vacancy or near-term roll.
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