U.S. Office Price Slump May Be Bottoming Out: Fitch Analyst

Investment firms are starting to respond to the U.S. office building valuation slump by setting up funds that could invest in distressed office building mortgages, according to Robert Vrchota.

Vrchota, a managing director in the commercial mortgage department at Fitch Ratings, talked about the appearance of distressed property funds Wednesday in New York, at a Fitch insurance conference.

The market for the buildings is bleak, with a typical value drop of about 50% for distressed buildings receiving “special servicing” for their mortgage payments, but “appraisers got better comps,” he said.

Access to better appraisals is starting to set what looks to investors like the start of a floor for office building prices, and the signs of potential stability are making investors more interested in that market, Vrchota said.

What it means: Life and annuity issuers have mostly been doing well, and their investments have been performing well, but their office building and office-related investments still need to be turned around.

Commercial real estate overview: Many life and annuity issuers invest in commercial real estate, commercial mortgage-backed securities and other real estate-related holdings in addition to high-grade corporate bonds, and attendees at the conference paid close attention as Vrchota talked about the state of the office building market.

He suggested that the submarkets for industrial properties, multifamily housing and retail properties other than shopping malls are having problems but show some signs of stability.