W.P. Carey Sells $36M Office, Surrenders Another Amid 30% Vacancy Rates

Key Takeaway

• W.P. Carey’s entity NLOP sold a 104,600 sq ft office building in Hoffman Estates for $36 million to Mizuho Americas.
• NLOP surrendered a 146,700 sq ft Warrenville office building to American National Insurance due to financial struggles.
• The suburban office market faces record-high vacancies over 30%, impacting property values and investor interest.

W.P. Carey’s Strategic Liquidation

W.P. Carey, through its entity Net Lease Office Properties (NLOP), has recently executed a significant divestiture of suburban office assets, reflecting the contrasting fortunes within the office market. The sale of the 104,600-square-foot office and industrial building at 2400 Huntington Boulevard for nearly $36 million to Mizuho Americas stands in stark contrast to the deed-in-lieu of foreclosure for the 146,700-square-foot office building at 4300 Winfield Road. These transactions underscore the challenges and opportunities present in the suburban office market, particularly in the wake of the pandemic-induced remote work era.

Divergent Outcomes in Suburban Office Sales

The sale of the Hoffman Estates property, which serves as the U.S. headquarters for DMG Mori, highlights a rare positive outcome in the current office market. The $36 million sale price, equating to approximately $344 per square foot, not only surpasses the $31.5 million W.P. Carey paid in 2009 but also reflects investor confidence in properties with stable, long-term tenants. DMG Mori’s long-term lease, with annual base rent of nearly $2.5 million and 3 percent yearly increases, provides a reliable cash flow that likely attracted Mizuho Americas to the investment. Conversely, the surrender of the Warrenville property to American National Insurance illustrates the struggles faced by office assets with short-term revenue prospects and high vacancies, exacerbated by the pandemic.

Broader Market Dynamics and Implications

The contrasting outcomes of these transactions are emblematic of broader trends in the office real estate sector. The suburban office market, grappling with record-high vacancies exceeding 30 percent, has seen a significant shift in investor sentiment. The pandemic has accelerated remote work trends, leading to a reevaluation of office space needs and a subsequent decline in demand. This is further evidenced by developers like Onni Group and Fulton Street Companies pivoting from office projects to multifamily developments in Chicago’s Fulton Market, as reported by Crain’s. These shifts highlight the growing preference for asset classes with more stable demand, such as multifamily housing, amid the ongoing uncertainty in the office sector.

My Perspective on the Market Shift

The recent transactions by W.P. Carey’s NLOP provide a microcosm of the challenges and opportunities within the office real estate market. While properties with long-term, stable tenants like DMG Mori can still attract significant investment, the broader market is facing a paradigm shift. The pivot by developers from office to multifamily projects in Chicago’s Fulton Market underscores the need for adaptability in real estate investment strategies. As remote work trends persist and interest rates remain high, the office sector must navigate a complex landscape of tenant retention and income stability. The sale of Vanbarton Group’s Hollywood office building to a religious organization further highlights the need for diversification and adaptive reuse in real estate portfolios.