The office is not dead, long live the office
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The office is not dead, long live the office

Cheerful office workers in the office, relaxing, having a coffee break and chatting together, they are standing in front of the

It may have become a dirty word for CMBS investors, but the reality is much more nuanced

The very word office has become so dirty in recent years that it has been a widespread cause of panic for everyone with any commercial involvement in the sector.

No different, investors with exposure to office space in their portfolios have been desperately offloading, based purely on the virtue of how exposed it makes them look.

But the panic doesn’t reflect how nuanced the situation actually is, and those investors who are willing to vet the securities and take a few risks have the potential to pick up some great deals at bargain basement prices.

Investors need look no further than CMBS office securities.

High quality office assets attract disproportionate demand in terms of commercial property transactions, but almost all CMBS office loans continue to be offloaded at deep discounts. There are plenty of opportunities to find deals backed by prime buildings, albeit those dumped in the market because of the uncertainty that holding these assets brings in 2023.

One investor told GlobalCapital that they found such a deal. A few weeks ago, they purchased a CMBS bond backed by a midtown Manhattan office building at only 28 cents of par. The building was refurbished just ten years ago and maintains an inherent value of at least $450 per square foot. The bond will be pay its coupon for five years and comes with the additional benefit of a sponsor that has proven it will defend the property through difficult times with cash injections.

Of course no investment is 100% safe, and this bond brings risk like all others. But with such strong collateral a default, or even foreclosure, is unlikely. And even if a default were to happen, the downside is about 50% while but the upside would be fourfold. This is an appealing risk return for any CMBS investor.

And market conditions means that the time is right to go out searching for yield. As the spreads for BBB- rated CMBS has reached 950bp above Treasuries, compared to only 340bp in January 2022, chances are there are many deals just like this out there.

Of course, behind concerns over office bonds remains a more tangible debate over whether offices are already dead because of the secular shift to remote working. Office use has decreased, yes, but it has not flatlined.

Ever since the pandemic began three years ago there have been discussions about the death of shopping malls, of movie theatres and other large scale community based areas with high proximities of people. In April of 2022, it was admittedly hard to imagine how businesses reliant on mass organisation would make it through the pandemic. But to varying degrees, they largely did.

And this is happening with offices too. Despite attestations that working from home can make workers more productive, many disagree — and sadly for most employees it tends to be the ones calling the shots who think this way. Some high-profile companies such as Disney, Starbucks, and Tesla have demanded employees return to the office for some time, betting on employees valuing the prestige of working there over the convenience they could find elsewhere. At the banks working from home has been allowed to a degree, but not encouraged. At JP Morgan senior leaders were recently called in five days a week as the firm looks to clamp down on remote work.

And as mass layoffs across sectors change the power dynamic between the employed and the employer, it looks increasingly likely that smaller companies will start to follow suit and demand a greater presence in the office. Even if their employees are less than thrilled with the mandate.

That is not to say that it’s the right time to invest in every single office deal out there, far from it. Deals done at a time when the working world was fundamentally different will obviously suffer at the hands of disfavourable rates. And with deep-pocketed landlords like Brookfield repeatedly defaulting on office loans and discussing foreclosures, investors have every reason to be cautious.

But office is not dead, it lives on. And once the shakeout is over office deals will be back. After all, isn't the best time to scope out bargains when nobody else is looking?

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