It’s been 30 years since the commercial real estate market was this bad, and according to one major developer, this represents a generational entry point for investment.
The trend towards hybrid working and high interest rates have caused commercial property values to plummet in major cities, with Morgan Stanley warning earlier this year that office prices could see a 30% drop due of lower demand.
But Don Peebles, president and CEO of Peebles Corporation, said his company tries to develop when the market supply is scarce and to buy when it sees exceptional value.
“And what we’re seeing here in the trading floors is essentially a once in a generation … buying opportunity,” he told CNBC on Friday. “Nothing like this has happened since the early 1990s.”
That’s when a banking crisis caused hundreds of lenders to close, allowing Peebles to acquire some buildings for as little as 20 cents on the dollar, he added, while properties held by failed savings and loans were liquidated.
In fact, the acquisitions that Peebles Corp. made in cities like Washington, D.C., at the time were the foundation that allowed the company to develop in other parts of the country, the CEO said.
As for today’s commercial real estate market, Peebles estimates that commercial office building values in San Francisco and Washington, D.C., are down 60%-70%, with Los Angeles down 70% or more.
But Peebles sees a recovery coming that developers can take advantage of, if they dare.
“Those are global cities that will eventually return,” he said. “So you have to be willing to buy, figure out how to stabilize assets based on current income potential, and then wait.”
To be sure, he expects the market to adapt to the new hybrid working environment, with the supply of commercial office space declining as many buildings are “converted, repositioned or demolished”.
This echoes what other observers have said. Fred Cordova, CEO of real estate consultancy Corion Enterprises, said some properties will recover while others will hang on, or not.
“And then there are the others that are basically worthless: the D class,” he said Fortune in February. “Those simply need to be torn down. This is probably at least 30% of all offices in the country.”
Like Peebles, other commercial real estate players also see opportunities. For example, earlier this year, Miami-based mortgage lender KDM Financial launched a $350 million fund, with a 20% portion earmarked for nonresidential commercial properties.
“I think I’m a bit of a contrarian in that I still believe in the office,” said Holly MacDonald-Korth, CEO of KDM Financial, in an interview with Fortune earlier this year. “We are currently in a phase of depression… But I don’t think so [in the] in the long term, offices will disappear forever.”