Here’s How Much More Office Prices Might Have to Fall to Restore Sales

Office has taken the lion’s share of a beating for a while now, but how much has it really been? MSCI recently did some estimations and calculations.

Office deal volume in the last quarter of 2023 fell 66% below the average Q4 volume between 2015 and 2019. The choice of timeframe rather than a typical year over year or between 2021 and 2023 is significant.

One of the caveats in discussing transaction volumes and sale prices has been considering the baseline. The years 2021 and 2022, pumped by pandemic demand, were record-breaking. The more unusual the baseline, the bigger the fall would seem to be, even if it were a reversion to an historical mean.

That’s not the case here. The comparison is from a pre-pandemic multi-year average, or “normal,” more or less. Office volume was two-thirds less than what could be seen as the most recent norm. The reason, according to MSCI, is the bid-ask price gap. Actual and potential sellers want so much more than the market might reasonably bear that the buyers are staying home.

MSCI used its Real Capital Analytics Commercial Property Price Indexes, or RCA CPPIs, to measure relative property values and how they change over time. The direction for office has been down.

“The RCA CPPI for offices fell 16.1% from a year earlier for the fourth quarter but that pace of decline simply was not enough to entice investors to step in from the sidelines and acquire more office assets,” the firm wrote. “Unless some outside force drives sudden new excitement around office investment, current owners of assets will need to endure further price declines if they need immediate liquidity for their holdings of office buildings.”

Looking at offices in central business districts, RCA CPPI for CBD office assets high a record high at the opening of 2022. Values are dropped by 40% since. In other words, in the first quarter of 2022, the average price per square foot was $408. In the fourth quarter of 2023, the same buildings would have sold for $245 per square foot.

However, there was still a gap. MSCI’s Price Expectations Gap for CBD Offices was -19.7% in 2023 Q4, below the implicit $245 price. If buyers and sellers had met in the middle, the average price would have been $221 per square foot.

MSCI says that a realistic price is between $221 and $245. Someone who bought CBD office property in the first quarter of 2022 and then wanted to sell in 2023 Q4 would have experienced a loss of between 40% and 46%.

For suburban offices, the price expectations gap was -9.5%, or roughly half of CBD office properties. Back to someone who bought in 2022 Q1 and sold in 2023 Q4, the loss would have been between 17% and 21%.