RealEstateNews 1.27.25

Weekly News Roundup

• Government to Sell D.C. Offices
• San Francisco Market Rebounding
• Residential Real Estate is Overpriced

Government to Sell D.C. Offices

The Trump administration is considering selling two-thirds of the federal government’s office stock to the private sector, according to people familiar with the transition operations. About three-quarters of the 70 million square feet of office space the GSA leases from private landlords in D.C. is also likely to be canceled, according to Don Peebles, a longtime Washington, D.C.-based developer. A sharp rise in GSA canceled leases would pressure D.C. landlords, many of which count on the GSA as an anchor tenant.

Some massive government buildings are empty or uninhabitable, said one former GSA official. Many others were built in the 1970s and have lacked the proper maintenance for decades. Much of what it can sell, Peebles said, will likely be at fire-sale prices. That could drag down the worth of other D.C. office buildings, which have already plunged in value in recent years. “Buildings will sell for 30 cents on the dollar,” Peebles said. “It’s a paradigm shift. There will be a dramatic reset on property values.”

Many federal office buildings are run with bare-bones services and have been nearly empty since the pandemic accelerated the trend of working from home. A recent report from Sen. Joni Ernst, a Republican from Iowa who chairs the Senate DOGE caucus, found that not one of the headquarters for any major agency or department in Washington is more than half full. GSA-owned buildings in Washington, D.C., average about a 12% occupancy rate. The government owns more than 7,500 vacant buildings across the country, and more than 2,200 that are partially empty. Source: Wall Street Journal

San Francisco Market Rebounding

Signaling a nascent commercial real estate recovery, San Francisco office sales are trending up, prices appear to have bottomed out and increased leasing demand might be leading to a price rebound for properties, according to the real-estate company CBRE. The indicators aligned with CBRE’s December pronouncement that the U.S. office market was finally stabilizing after a COVID-19 pandemic-induced downturn. Sales of office buildings in San Francisco, where office vacancy rates were at or near record highs last year, could top $1 billion in 2025, CBRE said.

The majority of office-building sales since 2023 were distressed, reflecting factors such as reduced income, inability to make debt payments or the need to refinance maturing loans. There are about 30 buildings currently under contract or being marketed for sale, and if those sell, about 9% of The City’s 100 million square feet of office inventory would have been sold at a substantial discount from previous acquisition prices since 2023, according to data provided by Colin Yasukochi, executive director of CBRE’s Tech Insights Center.

The average price per square foot for office buildings increased to $310 in 2024 from $253 per square foot in 2023 and a peak of $1,106 per square foot in 2022, when only three buildings were sold. The reset in prices could allow new landlords the opportunity to lower rents — which could spur leasing activity — and invest capital into improvements to create vibrant environments that are attractive to companies and employees, CBRE said. If leasing trends further improve, interest rates decline and the economy accelerates, recent investors could be rewarded with much higher building values in the years ahead, the company said. Source: San Francisco Examiner

Residential Real Estate is Overpriced

The stock market is pricing portfolios of American homes at a hefty discount to what houses are changing hands for in the open market. Shares of single-family landlords Invitation Homes and American Homes 4 Rent are trading at 35% and 20% discounts to their net asset values, respectively, according to real-estate analytics firm Green Street. Invitation Homes’ stock has traded at a particularly large discount to NAV since interest rates began to rise in early 2022, but the gap has widened by 10 percentage points in the past year.

Put another way, while the average house in the metro areas where Invitation Homes owns its properties sells for $415,000 based on Green Street’s analysis of prevailing market values, the company’s share price implies that investors think $310,000 is more appropriate. “Share prices are signaling that single-family-home prices are too high and are not sustainable,” says John Pawlowski, a managing director at Green Street. However, he points out that home values can remain disconnected in public and private markets for longer than for commercial real estate because prices are set by owner-occupiers rather than investors.

Buying from the existing housing stock doesn’t make much financial sense to Wall Street right now. The average American home is valued at a roughly 4% cap rate, a measure of the annual net operating income a property could generate as a percentage of its market value. This is too expensive for big investors who need to buy at a 5%-to-6% cap rate to make an acceptable return, given how costly it has become to borrow. Notably, landlords can’t make the math work, even though their cost of debt is slightly lower than a regular buyer. Large players such as American Homes 4 Rent are building houses themselves, or buying newly constructed units directly from builders. Source: Wall Street Journal