With commercial real estate now at an all-time high, the future is looking particularly bleak for companies renting office spaces.
A Canadian pension fund company recently sold its stake in a New York City office tower for just $1. What does that mean?
The COVID-19 Pandemic Started Real Estate Issues
When the COVID-19 pandemic began, this started a precedent for employees to be able to work from home.
With this still ongoing and many workers able to work from pretty much anywhere, and inflation causing high interest rates, this began a fear of what is to become of real estate.
Investors Are Keen to Sell their Commercial Real Estate Investments
Where commercial real estate was once a good investment to make, the pandemic and inflation have made this a less viable investment, according to Business Insider.
As companies are less likely to be using office space and with those that do allow many workers to work from home, investors are starting to struggle with justifying these investments.
Canadian Pension Funds Were Very Prolific in Real Estate
According to Bloomsburg, Canadian Pension Funds were once prolific investors in real estate and encouraged other pension funds to follow suit.
Despite them previously leading the charge in making real estate investments, they are now causing investors to believe they should invest their money elsewhere.
A Canadian Pension Fund Sold Their Stake for $1
One of the major Canadian pension funds, the Canadian Pension Plan Investment Board (CPPIB), recently sold its stake in an NYC office tower for just $1.
The CPPIB was in debt. Their plans for the building were to redevelop it. They have since sold it to Boston Properties, who bought the stake for $1 and have taken on CPPIB’s debt.
CPPIB Also Sold Some of Its Other Investments
Aside from the New York building that sold for $1, CPPIB also sold some other investments, which has increased the anxiety surrounding real estate investments.
The other real estate investments sold were a pair of Vancouver towers and a business park in Southern California.
CPPIB Lost Money on Its Other Investments
While having a 29% stake bought for $1 seems like a massive loss, CPPIB also lost big amounts of money on its other investments.
For example, according to Business Insider, the Southern California business park that they had a 45% stake in sold for $38 million. This might be more than $1, but it is a loss of 75% compared to what they bought it for in 2018.
Banks Are Saying That Offices Are a Bad Investment
Banks from New York to Tokyo are warning investors that investing in offices in the current climate is a bad idea, according to Mint.
New York Community Bancorp slashed its dividend and stockpile reserves, causing its stock to go down 38%, and Aozora Bank warned of losses tied to U.S. commercial property investments, causing their stock to go down 20%.
CPPIB Has a Large Investment Portfolio
CPPIB has a large investment fund of $590.8 billion, with $41.4 billion in real estate.
The types of real estate CPPIB has invested in include warehouses and apartment blocks. Due to the size of this portfolio, something such as selling a 29% state in a New York office for $1 is enough to cause worry across the investment world.
CPPIB Says There Is Nothing to Worry About
While many investors are worried about what CPPIB selling its stake in an office building for $1 will do to the real estate sector, CPPIB says there is nothing to worry about.
Petter Ballon, who is the global head of CPPIB’s real estate, has said that selling is an important part of investing and that they will sell their share when they have maximized its value, according to Financial Post.
Making a Return Investment Will Cost You a Lot of Money
With there being a lack of demand in office spaces, this has changed how investors are investing their money.
Matt Hershey, who is a partner at Hodes Weill & Associates, has said that investors will now have to put lots of money into an office to get better returns and advises that it might be best to cut any losses and invest money elsewhere.
Office Spaces May Be Turned into Residential Buildings
As many people are now working from home and there is less of a need for office space, an idea has been suggested that office space should be turned into residential buildings.
According to Business Insider, this could be tricky, as not all office space has been designed or constructed to be residential space; however, with a bit of planning and time, it is doable.
Office Vacancies Will Rise … But That’s Not the Solution
With office vacancies currently being at 13.5% and expected to rise to 18% in the next decade, some believe that this could help the housing shortage.
But Business Insider says this isn’t possible, as Goldman Sachs has stated that only 4% of office space is viable for conversion. So with this and the loss investors are making in offices, it’s unclear as to when or if this issue will be solved.
