According to Fitch Ratings, San Francisco is leading the decline in office building prices nationwide for cities with high vacancy rates. Despite expectations of continued strain on the property market, this drop in prices is significant.
Plummeting Prices Reflect Pandemic Impact
In 2020, office buildings in San Francisco reached peak sales prices of approximately $1,056 per square foot. However, following the onset of the pandemic, these prices have plummeted to around $595 per square foot in 2023. Consequently, all price gains that the city experienced since 2017 have now evaporated.
Other Cities Experience Similar Trends
Not only San Francisco but also San Jose, Boston, Seattle, and New York are experiencing a sharp decline in office building prices through 2023. It is important to note that these trends are primarily based on sluggish transaction volumes. Due to limited sales, comparable data and accurate valuations pose significant challenges for the next few years.
Challenges Ahead for Commercial Real Estate Loans
Fitch’s structured finance analysts, headed by Melissa Che, highlight another concern – an estimated $10.5 billion of commercial real-estate loans in bond deals will mature by 2024, potentially facing refinancing challenges. The team predicts that only 50%-60% of office loans maturing by the end of this year will be able to refinance. This is due, in part, to their 4.8% weighted average coupon rate being well below the current market rate of approximately 7%.
Given these market conditions, San Francisco’s office building prices have experienced a significant decline alongside other cities with high vacancy rates. The outlook for the property market in the coming years remains uncertain as loans mature and pricing adjustments occur.
Stocks Rally as Inflation Data Sparks Hope for Fed Rate Cut
Stocks experienced a rally on Wednesday following the release of inflation data for June. This data has ignited hopes among investors that the Federal Reserve may soon end its aggressive cycle of rate hikes. According to FactSet, the Dow Jones Industrial Average (DJIA) rose by over 130 points, or 0.4%, while the S&P 500 index increased by 0.8%.
At present, the Fed’s benchmark policy rate stands between 5% and 5.25%. It is widely anticipated that an additional 25 basis points increase will be implemented later this month. Furthermore, the benchmark 10-year Treasury yield, which is utilized for property loans, fell to 3.84% on Wednesday, after reaching as high as 4.09% earlier in July.
However, despite the current positive trend in the market, there are concerning signs for the future. Fitch Ratings has predicted that the overall office vacancy rate across the nation will rise to 17.6% by 2026, a significant increase from 12.5% in 2022. Focusing specifically on office buildings, Fitch points out that many downgrades in the commercial mortgage-backed securities market were linked to underperforming Class B and Class C properties, exacerbating existing challenges with below investment-grade bonds.
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