Hot office debate: ‘Not a dirty word’ vs ‘no, no, no, no’

Industry executives agree on a positive outlook for US real estate, but not on whether the upswing will include the out-of-favor sector.

From left to right: Winters, Schiff, Coleman, Pryce and Donegan speak at the Women in Private Markets conference

Positive undercurrents in the US real estate market have asset managers readying to deploy dry powder after a difficult two-year downturn, according to panelists at affiliate title Private Equity International’s Women in Private Markets Summit North America 2024 in New York last week. However, they disagree on where exactly to put it.

In the opening session, “The state of play in North American real estate,” panelists were generally bullish on investing in the residential and industrial sectors.

“We are heavily focused on increasing our exposure around multifamily and industrial,” said one executive. “Everyone talks about the wave of [multifamily] maturities coming… we think those are going to create very unique entry points.”

But opinions were split on the office sector.

“Office isn’t always a dirty word,” said one investor. “There may be opportunity. Don’t be afraid to look where others are running, because that’s where you’re probably going to find a really great deal.”

That prompted a quick response from a manager speaking on the panel.

“I’ve got some! If anyone wants office, I’ve got some,” she said, drawing laughter from the crowd. It was a point she had made earlier in the discussion: “Office – no, no, no, no.”

The panelist said her firm has $3 billion to place this year, though the allocation amount is about half of what her firm was investing before 2022.

The office sector in the US has struggled to recover since the covid-19 pandemic, as workers have been largely resistant to return to office policies. The US vacancy rate is hovering around 20 percent, up from 14 percent pre-pandemic, according to an analyst who spoke on a separate panel dedicated to the office market.

That analyst believed fears of an office sector implosion are overblown. Speaking on a separate panel about the office sector, she said the lowest-performing 10 percent of office assets nationally account for 60 percent of all vacancies, with the lowest 1 percent accounting for 17 percent of vacancies.

The conference panelists spoke amid growing optimism for investing in US commercial real estate. The world’s largest property market has faced headwinds since 2022, when the Federal Reserve began increasing interest rates at a historically sharp pace to wrangle inflation. But sellers are finally adapting to higher rates, which are stabilizing as inflation comes under control.

“The bad is mostly behind us,” said the manager. “In the US, we’re 14 percent below long-term replacement cost.”

That is bringing investors back into the market, which one investor said has shifted internal conversations away from calling the bottom of the market to investing in the trough.

“The dislocation on the debt side, there’s certain opportunities embedded in that but you have to be extremely careful about guessing interest rates or debt yields on the way out,” another investor said. “We’ve underwritten $10 billion of deals and almost nothing makes sense.”

Although opportunities are beginning to emerge, the manager said her firm will not fully loosen the purse strings until the market picks up.

“We anticipate there will be an upswing, so part of our opportunity set is making sure we’re balancing our capital in terms of being thoughtful about maintaining our existing portfolio, continuing to invest with our existing partners, but at the same time holding some dry powder back because most of these cycles have shown there’s some outperformance ahead of us,” she said.

The opening panel included executives Maggie Coleman, chief investment officer, North America, real estate, Manulife Investment Management; Julie Donegan, director of real estate at CalSTRS; Wendy Pryce, head Americas real estate specialist at Nuveen; and Vicky Schiff, chief executive of Avrio Real Estate. The session was moderated by Dan Winters, senior director at GRESB.