Broker also reveals why banks are finally taking back paper and clearing their books
One of the biggest challenges in the commercial real estate business since the pandemic has been the office sector. While there has been some improvement, there are still headwinds to work through.
Well-placed offices with plenty of amenities, typically Class A office space, have seen a nice rebound in many major metropolitan areas. They have been the offices to benefit most from corporate return-to-office policies.
For lesser office space, the results have been mixed. Some of it is being converted, others are being coveted, and still a third group is seeing banks ready to move on from the properties. One veteran commercial broker has seen all three trends emerge in the Mid-Atlantic region.
Marc Tropp (pictured top), senior managing director with Eastern Union, said the first trend he’s seeing in and around Washington, DC, is conversions into multifamily living space. Most of those are older buildings, while buildings from around the turn of the century remain vacant.
“The big trend in this market has really been the office to multifamily conversion,” Tropp told Mortgage Professional America. “Inside Washington, DC, there are a lot of vintage 1960s and 1970s buildings that have been renovated. But the early 2000s buildings are currently vacant. They had government contracts, or had some other company that had a government contract that fell through. The question is, are those floor plans sufficient enough to build apartments?
“The other question is, do people want to live in those markets? If you're in the central business district, surrounded by other office buildings, can a multifamily property survive? DC is really a 7:30 a.m. to 7 p.m. city.”
A move to the suburbs
One trend that might be surprising to some in the commercial real estate market has been a surge in suburban office space. Tropp said these aren’t huge offices, but there appears to be a market for these spaces outside of the city centers.
“When you move a little bit farther back to the suburban market in Maryland, the thing that's been surprising has been the resurgence of suburban office,” Tropp said. “That's been a big trend over the past three to four months. These are smaller offices, not massive, I'd say 100,000 square feet and under.
“We're beginning to see that there is a pretty large demand for the 2,500 to 5,000 square foot office space. It still provides some in-office space when people want to come in, but it is also not too big to where people still can't work a day or two hybrid from their house.”
Of course, the demand in the Washington DC area relies on government demand for workers. In the early stages of President Donald Trump’s second term, the government reduced its workforce significantly. However, recent developments, including the Consumer Financial Protection Bureau (CFPB) potentially ramping up staffing again, could lead to a surge in the need for office space in the nation’s capital.
“If the government says they’re going to bring in outside sources to help them, I think you're going to get a huge influx of people to move back to the area, and specifically increase demand for office space,” Tropp said. “If they start bringing that back, I think you're going to start seeing less conversion and more signing leases.”
Banks throwing in the towel
Even with rate volatility, commercial brokers could start seeing more deals come across their desks. Tropp said that’s because banks are extending less and instead demanding that underperforming properties get moved to a new owner who can try to turn them around.
“We're seeing a lot of sales,” he said. “You've seen a lot of companies just unloading them and saying, ‘We tried to make a run of it, but it didn't work out. We're also starting to see banks take back paper. For the past two years, they've been kicking the can down the road, hoping that interest rates fall. They have come down, but not to a point that makes sense for the refinance or to support the debt that's on the building right now.
“One of the big things that we've seen at least this year has been banks saying, ‘Enough's enough. We've tried to give you guys enough opportunities to get this to work.’ It's a two-way street for them. They don't want to foreclose, but now they're like, ‘We have to clean the balance sheet out. We have to get back up lending again.’”
That has presented opportunities for commercial brokers like Tropp, who are getting phone calls from banks looking for potential buyers for these properties.
“We're actually getting phone calls to see if we know any buyers who may want to buy that paper,” Tropp said. “We have a handful of people who really own pretty much all the major asset classes in the area. If the bank calls us, we'll call those five or 10 people and see if they’re interested. The more touch points that we can have, either with our clients or the lenders, the better. We’re always looking to help them out, and if we could also get the debt on the sale, that’s a cherry on top.”
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