Office Tenants Become Buyers

On today’s show we are talking about a growing trend in the office market. This was reported last week in Urban Land Magazine.

It seems that U.S. Office Tenants Are Becoming Buyers. Deep discounts, favorable financing, and long-term benefits are turning users into owners.

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Episode Transcript

(00:02):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show, we're talking
about a growing trend in the office market.
This was reported last week in Urban Land Magazine.
It seems that US office tenants are becoming buyers.
Deep discounts, favorable financing terms and long term

(00:22):
benefits are turning users into owners.
Tenants who had been leasing space are now looking to buy the
building outright. Often it reduced prices in
favorable terms. They're reaping long term
benefits from property ownershipas opposed to paying the
landlord. According to JLL, these types of
acquisitions accounted for 20% of total US office sales in the

(00:43):
first quarter of this year, up from 15% for all of 2024.
And before the pandemic, those types of sales only represented
8% or less annually. Now, in some smaller markets,
smaller buildings, the percentage of tenant purchases
is even higher. The research supporting this was
reported by Mike McDonald, senior managing director at

(01:03):
brokerage house JLL. One of the case studies is the
Los Angeles County's recent acquisition of the Gas Company
Tower in downtown Los Angeles. At the time, the county had been
exploring alternatives to costlyseismic retrofits on its
existing leased properties. The newer, more modern Gas
Company, Tower offered a cheaperoption.

(01:23):
The opportunity came about afterBrookfield chose not to extend
its $784,000,000 loan tied to the building and another office
building, and the property went into receivership back in 2023.
It was sold at auction last year.
We actually reported on this foreclosure back in 2023 when it
happened. The county closed in December

(01:43):
after paying about $200 million for building that valued at $632
million just four years ago. Now, since modern high rise
buildings require less retrofit than these aging leased spaces,
LA County's transition from Pennant to owner will
potentially save them hundreds of millions of dollars over the
long term. Some estimates put the cost of

(02:03):
retrofit and complete the seismic retrofits for the old LA
County buildings at $1500 a square foot.
Instead, they bought a tower forless than 200 a square foot, far
below replacement cost and maybeneeds a little bit of work, but
it's a bargain. By comparison, Now the folks at
JLL have about a billion square feet of office space across the
United States, and they saw a 76% increase in bid activity

(02:26):
from tenants in 2024 compared with the year before.
Some organizations, particularlythose with stable growth or very
specific operational needs, are increasingly viewing this as a
preferred strategy. It helps the tenants gain
control, optimize their environment and secure their
long term presence in a market. Now, three factors are driving
the surge, according to JLL. First, there's been a

(02:48):
significant reset in office values.
Most buildings across the country are selling far below
replacement cost #2 tenants now have better visibility into
their long term space requirements and their growth
needs gives them more confidenceto make a long term real estate
commitment. On the flip side, for
traditional property investors that are seeking tenants, it
remains much harder to anticipate a customer space

(03:10):
requirements as many of these companies are still navigating
their evolving work setups and figuring out how to adapt to
hybrid and remote work models post pandemic.
And then lastly, with the current market dynamics, tenants
can obtain capital for these purchases at corporate lending
rates significantly lower often than rates that are available to

(03:30):
traditional investors. The organizations often can take
advantage of more creative financing strategies like for
example, municipal bonds or leveraging the company's balance
sheet that's not typically available to all investors.
Some tenants have long standing relationships with their banks.
Where these banks hold large deposits, they run the company's
payroll. As a result, the banks are much

(03:51):
more willing to lend to businesses that own or occupy
their own space then they might be with an investor.
Some organizations have been able to leverage the bank
relationships to secure more favorable long term financing,
maybe 2025 year loans compared to the more typical 5 and 10
year financings that investors typically are able to get.
If we go back in the period pre pandemic from 2015 to 2019,

(04:15):
major technology companies accounted for most of the
building acquisitions that were made by tenants.
That activity is pretty much dried up and while some
corporate users are returning tothe office, a new wave of buyers
has emerged. These include counties, cities,
state governments, users from education and healthcare.
In smaller markets like Reno, NV, more than half of the office

(04:36):
sales closed in the city were owner occupied deals.
A lot of these deals involved medical services companies in
construction and some of the technical trades.
One of the main benefits an owner gets is the amortization
of the tenant, improvements of the actual fitting of the space.
If a tenant has a particularly expensive build out, they are
actually better off owning than upgrading leased space because

(04:57):
as a tenant you write off your improvements over either 5 or 10
years, but as an owner you can depreciate that roughly over 35
years. It makes the ownership more
favorable on the balance sheet. Another major incentive for
tenant buyers is the immediate reset and property taxes.
The landlord is often paying higher property taxes based on
pre pandemic valuations. But if a tenant purchases the

(05:20):
building and the property is reassessed at a new, lower
purchase price also lower the property taxes and therefore
lowers the cost of ownership. So if a building once sold for
$1000 a square foot and now you're buying it for five or
$600 a square foot, the annual property taxes are cut in half.
And then from the perspective ofa building owner, selling to a
tenant is a lot easier than looking to find new investors

(05:43):
for that building. After all, the tenants know the
building. You don't need to educate them
on what the building's all about.
And if the tenants ultimately the buyer, you don't really need
to convince them of its value. Now, this may not necessarily be
a huge win for struggling officeowners, but it's going to be a
smaller loss relative to the other options.
As always, I think it's important for real estate

(06:03):
investors to understand the dynamics that are playing the
marketplace. As you think about that, have an
awesome rest of your day. Go make some great things
happen. We'll talk to you again
tomorrow.