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The Canada Pension Plan Investment Board, the biggest pension in Canada, has completed a string of recent deals at discounted prices, including a sale of its stake in a New York building for $1, Bloomberg reported Tuesday.
Commercial real estate concerns have escalated thanks to the pandemic's work-from-home boom and high interest rates in the wake of the Federal Reserve's inflation fight, and the gravest fears center on what some described as the office apocalypse.
Office vacancies hit an all-time high in January and remote work looks like it's here to stay, darkening the outlook for investors in the space.
The Canada Pension Plan Investment Board did not immediately respond to Business Insider's request for comment.
At the end of 2023, the group offloaded its 29% stake in 360 Park Avenue South for a buck, selling to one of its partners, Boston Properties, who also took on the pension's share of debt on the building, per Bloomberg. The plan at the time of purchase had been to redevelop the 20-story office building.
The pension also sold a 45% stake in Santa Monica Business Park, the report said, for $38 million at the end of last year. That represents about a 75% discount to what was paid at the time of purchase in 2018.
The Canada Pension Plan Investment Board operates a $436.9 billion fund, with a global real estate portfolio worth roughly $30.6 billion. According to the Bloomberg report, the pension isn't backing out entirely from the office real estate sector, but it's also limiting its holdings in the space.
Concerns have risen in the past year over banks and other large firms' holdings of commercial real estate investments, with spasms of volatility hitting the regional bank sector since the collapse of Silicon Valley Bank a year ago. Most recently, investors sparked a steep sell-off in shares of New York Community Bank, partly over its exposure to commercial mortgage debt.
Some forecasters have floated the idea of office-to-residential conversions as a way to mitigate the office collapse while also boosting inventory for the supply-starved housing market, but that would require financing and logistics that aren't always favorable for property owners.
Goldman Sachs said it expects office vacancies to rise from 13.5% this year to 18% in the next decade. The bank's analysts wrote in a Monday note that office conversions won't be the solution for the housing shortage.
Meanwhile, Capital Economics forecasts that prices on office buildings could plunge 20% peak-to-tough, and the sector may not recover for decades.
Economists at Moody's, too, expect more pain ahead for commercial real estate.
"Despite the increasingly optimistic consensus on the likelihood of a macroeconomic soft landing along with positive news from the labor market, the permanence of dynamic hybrid models has effectively muted office demand, making the year of 2023 the most downbeat since the Great Financial Crisis," Moody's wrote in a recent note.
