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San Francisco has been leading the drop in prices for office buildings nationally for cities with high vacancy rates, even as sagging rents are expected to weigh on the property market for years to come, according to Fitch Ratings.
Office buildings in San Francisco commanded top sales prices of about $1,056 per square foot (see chart) in 2020, but in the wake of the pandemic prices have tumbled to about $595 per square foot in 2023, according to Fitch Ratings. That implies all price gains in the city since 2017 have evaporated.
San Francisco office building prices are falling the most among high-vacancy cities.
Fitch Ratings, CoStar Group
San Jose, Boston, Seattle and New York are other high-vacancy cities to experience a sharp pullback in prices for office building through 2023, albeit based on sluggish transaction volumes.
“There are few sales to provide comparables and clarity on valuations, which are likely to be volatile for the next few years as loans mature and pricing rests occur,” said Fitch structured finance analysts led by Melissa Che, in a Wednesday note.
The team also pinpointed some $10.5 billion of commercial real-estate loans in bond deals coming due through 2024, some likely to face refinancing challenges. Che’s team estimated that only 50%-60% of office loans maturing by the end of this year look likely to be able to refinance, in part because their 4.8% weighted average coupon is well below the roughly 7% prevailing market rate.
Stocks rallied on Wednesday after inflation data for June stirred hopes that the Federal Reserve might be nearing the end of its aggressive rate-hiking cycle. The Dow Jones Industrial Average
DJIA,
was up more than 130 points, or 0.4%, while the S&P 500 index
SPX,
was up 0.8%, according to FactSet.
The Fed’s benchmark policy rate of 5%-5.25% is widely expected to increase by another 25 basis points later this month. The benchmark 10-year Treasury yield,
TMUBMUSD10Y,
used to property loans, fell to 3.84% Wednesday, after trading as high as 4.09% earlier in July, according to FactSet.
But in a dismal sign for the future, the Fitch team expects the overall office vacancy rate to climb to 17.6% nationally through 2026, up from 12.5% in 2022. For offices, the team said most of its ratings downgrades in the commercial mortgage-backed securities (CMBS) market in 2022 and 2023 were tied to underperforming Class B and Class C office buildings, which compounded existing problems with bonds rated below investment-grade.
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