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- The office market is only halfway through its downtrend, a real estate expert said.
- That comes as some properties have recently sold for more than 50% below previous transaction prices.
- Cohen & Steers' Rich Hill told CNBC that valuation declines could get even worse than that.
The office market is still working its way through a downtrend, and some properties could notch even worse price declines than recent deals have seen, a real estate expert said.
That comes as work-from-home and hybrid-work trends persist, prompting vacancy rates to rise as companies reduce the amount of office space they use.
"As we think about the office market, and maybe as a microcosm for the overall commercial real estate market, we think valuations are only 50% of the way through their declines," Rich Hill, head of real estate strategy and research at Cohen & Steers, told CNBC on Wednesday.
The office market will see its next leg lower in 2024 as distressed properties work their way through the system, he added.
The warning came after a Los Angeles office building was sold on Tuesday for 52% less than its price in 2018. And just days earlier, the third tallest office high rise in LA was sold for 45% less than its price in 2014.
"So you're going to see a lot more headlines like this with valuations being down more than 50%," Hill said. "I think you're probably going to see some headlines that are even more severe than that."
While offices make up about a fifth of the overall commercial real estate market, they have received heightened attention as Wall Street raises dire warnings.
Earlier this month, Capital Economics said office buildings still have another 20% price plunge ahead, adding that the overall peak-to-trough decline for US office values will reach 43% and that it will likely take two decades or more before they regain their early-2020 peak.
Also this month, a working paper from researchers at USC, Columbia, Stanford, and Northwestern said commercial real estate sector is at risk of seeing its biggest crash since 2008.
It estimated that due to declines in property values from rate hikes and remote work, about 14% of all loans and 44% of office loans are in negative equity, meaning current values are less than outstanding mortgage balances.
As a result, 10%-20% of all commercial real estate loans could end up defaulting, and banks could see around $160 billion in losses, according to the paper.