Wall Street firms are raising new funds to acquire office buildings, apartments and other troubled commercial real estate, looking to scoop up properties at a fraction of the price investors paid a few years ago.
Cohen & Steers, Goldman Sachs, EQT Exeter and BGO, formerly known as BentallGreenOak, are among the prominent names raising billions of dollars for funds to target distressed assets and other real estate with slumping values, according to regulatory filings.
“The last few weeks, I’ve been saying, ‘holy mackerel, they’re coming out of the woodwork,’” said Kevin Gannon, chief executive of Robert A. Stanger & Co., an investment-banking firm that tracks real-estate fundraising. With housing in short supply, developers are converting more empty offices into apartments. But not all buildings are candidates for reuse, even as more than one billion square feet of office space sits vacant across the U.S.
The new funds are seeking to capitalize on one of the most troubled commercial-property markets in decades. Values have nosedived since interest rates spiked last year, driving up borrowing costs in the highly leveraged business. The office market, one of the largest sectors, has also been clobbered by a sluggish return-to-office rate, which has sent vacancy rates soaring. Apartment buildings, an investor haven in the past, look vulnerable as owners try to refinance at much higher rates. Mall owners are contending with steep value declines, some of more than 70% over the past few years.
Commercial-property sales have been moribund until recently because most sellers haven’t been willing to cut their prices to the levels that buyers are demanding. Now, a small but growing number of office owners have begun to capitulate, unloading distressed properties. The capitulation marks a new phase in the commercial real-estate upheaval, as more beleaguered property owners turn over properties to lenders or decide to take what they can get, rather than hold out hope for an eventual recovery. This wave of fundraising is the latest sign that sales activity is expected to increase as more sellers yield on price.
In one recent example, the owner of a downtown San Francisco office tower unloaded the property for $41 million to developer Presidio Bay. The seller, Clarion Partners, had purchased the property for $107 million in 2014.
While the clearest distress is in the office sector, many property owners with floating-rate debt may also feel pressured to sell at marked-down prices because they are unable to refinance at today’s higher rates. In addition, fund managers expect values to fall as regional banks, under pressure from this year’s rash of bank failures, unload commercial-property loan portfolios at discounted prices.