As the dust settles from the pandemic’s upheaval, the commercial real estate market tells a tale of two worlds. While Class A office space has rebounded, with valuations returning to pre-pandemic highs thanks to a “flight to quality” since 2022, the outlook for other segments is less rosy. Many industry experts believe that office valuations in certain asset classes and markets may not return to their 2019 peaks for another decade, suggesting that current prices are at a relative low point.
In this environment, organizations with a long-term need to remain anchored in specific locations—such as public transit authorities, universities, healthcare providers, or well-capitalized traditional businesses—are uniquely positioned to capitalize on opportunities in the B and C office market. For these entities, the decision to acquire office assets is not about chasing short-term gains, but about aligning real estate investments with a resilient, long-range business strategy. Such a strategy must weigh whether owning real estate will ultimately yield a better return than reinvesting in core operations, and must also consider the balance between the stability of ownership and the flexibility that leasing can provide.
Ownership, however, brings its own set of challenges and opportunities. Companies may find flexibility in acting as landlords, leasing out unused space on a short-term basis to accommodate future expansion, or even choosing to resell the property down the line, perhaps through a sale-leaseback arrangement. Yet, managing owned real estate is fundamentally different from managing leased space. Lessees, especially those with gross leases, typically depend on landlords for property management and maintenance. In contrast, owner-occupiers bear full responsibility for upkeep—a task that becomes even more complex if they also lease space to other tenants, though this can be outsourced to a facilities manager.
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The financial calculus of ownership versus leasing extends beyond operational considerations. If the costs of relocating are manageable, purchasing and moving into distressed B or C class office space may present a compelling opportunity. The transition to property ownership should be viewed not just as a real estate transaction, but as a service to employees and tenants, with all the associated costs and responsibilities.
Tax implications also play a pivotal role. Lessees can generally deduct lease payments, including property operating expenses, without direct limitations on the amount. Owners, on the other hand, can deduct depreciation, interest on leveraged purchases, and various operating expenses, though more restrictions may apply. The timing of these deductions can be advantageous, particularly due to depreciation, and certain components of a property may qualify for accelerated depreciation or immediate expensing. Non-profits have additional levers, sometimes structuring deals for mutual tax benefits or gaining exemptions from real estate taxes as owners—advantages not always available to lessees.
Investment opportunities in this market are not limited to straightforward purchases with cash or traditional mortgages. Sellers and lenders eager to offload or recapitalize properties may entertain creative financing and ownership structures, such as installment purchases, condominium arrangements, tenancy-in-common ownership, or acquiring a stake in an existing ownership entity. While buying a tenant-in-common or partnership interest can offer a lower-cost entry point and potential financial returns, it may also mean ceding some operational control and navigating potential conflicts of interest with partners whose priorities may not align.
Ultimately, the complexity of commercial real estate transactions demands careful attention to detail. Well-crafted agreements with clear buy-sell provisions and a thorough understanding of future obligations—such as capital improvements and debt refinancing—are essential to safeguarding the interests of any organization venturing into ownership in today’s evolving office market.
Jahn Brodwin is a senior managing director and co-leader of the Real Estate Solutions practice at FTI Consulting, Inc. Contact him at [email protected]. Rob Raymond is a managing director in the Real Estate Solutions practice at FTI Consulting, Inc. Contact him at [email protected].
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