The Office Isn’t Dead Yet, Says WTW

Commercial real estate still presents opportunities to invest — if you know how to play it.


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The death of commercial real estate has been overblown, according to Willis Towers Watson.

For the past year, the prevailing narrative in the commercial real estate market is that the staying power of the hybrid work model — and the failure of several prominent real estate lender banks — has caused valuations to tumble.

Meanwhile, rising interest rates spiked the cost of debt financing for real estate borrowers, driving down property valuations.

But, as WTW senior director of investment Jon Pliner said, this problem is one primarily plaguing office space, rather than other commercial real estate subsectors.

What’s more, there are opportunities to invest, and to lend — one just has to know where to look.

“If you have the death of something, certainly that can bring opportunities via distressed debt to that asset class,” Pliner said by phone. “Plus, office is a very small portion of the overall commercial real estate business.”

According to Pliner, commercial real estate also includes medical offices and life sciences buildings, where biotech and pharmaceutical companies complete their research. “You can’t do a lot of that work remotely,” Pliner said.

The idea that the failure of commercial bank lenders will be a huge problem for the commercial real estate market is overblown. According to WTW, articles regularly cite a statistic that 70 percent of total CRE lending is coming from small banks. But WTW said small banks only account for 38 percent of the total $4.6 trillion loaned to commercial mortgages.

In other words, there is still debt available in this market, and investors can tap into it. According to the report, there could be attractive risk-adjusted returns across the capital stack in commercial real estate, including senior and mezzanine debt and preferred equity. It could also be a good time to buy discounted loan pools from banks, which are looking to prune their balance sheets.

Another myth is that the “wall of maturities” in the commercial real estate market is going to sink the sector. Although it is true that there is a large volume of CRE loans maturing this year, there are mechanisms to get around potential defaults, including loan extensions.

“There are maturities that are coming due, but there’s not necessarily a desire for the lenders to take over the equity of the buildings,” Pliner said. “Lenders are finding interesting ways of extending the debt wall or looking at other areas.” This may include strategic defaults, according to WTW.

Although there has been chatter about the possibility of converting office spaces into housing or other much-needed types of real estate, Pliner is skeptical of whether this could be an effective solution for the marketplace.

“One of the key hurdles to that is a regulatory hurdle and the zoning for those assets,” Pliner said. “It will be required for zoning to change or special privileges.”

Instead, WTW believes that solutions for CRE investors will be in the debt markets, dispersion between the best and worst assets, and, of course, diversification.