When Elliott Management, the hedge fund led by Paul Singer, makes an investment, it often signals trouble for the target company or even a country. The firm is known for its distressed investments, such as its lengthy legal battle with Argentina over bonds and its involvement in high-profile corporate disputes and takeovers.
Elliott’s latest move involves teaming up with Mukang Cho’s Morning Calm Management to acquire City Office REIT in a deal valued at $1.1 billion. City Office is based in Vancouver but owns no Canadian properties; instead, it holds office buildings across the Sun Belt region of the United States. The REIT controlled 4.2 million square feet of office space and charged an average gross rent of $34.89 per square foot. Its stock price had peaked at $21 in 2022 but ultimately shareholders received $7 per share in the acquisition—a 26 percent premium from its last trading day.
The purchase may signal renewed investor interest in the struggling office sector after years of uncertainty following the Covid-19 pandemic. Industry experts have long anticipated that large investors would seek out undervalued public real estate companies and take them private, capitalizing on discrepancies between stock prices and asset values.
Recent transactions support this trend. Rithm Capital acquired Paramount Group—an office landlord with holdings in New York City and San Francisco—in a $1.6 billion deal, despite Paramount previously valuing its real estate at $6.6 billion. Rithm reported that Paramount’s stock was trading at a 40 percent discount to book value before the sale and projected a potential 20x internal rate of return from the acquisition.
Other firms are also considering similar moves: Franklin Street, an office REIT based in Massachusetts with properties in the Mountain West and Sunbelt regions, is seeking buyers after its stock fell below $1 per share; Orion Properties of Phoenix is exploring a sale after fending off a takeover attempt.
Mukang Cho commented on these developments: “A potential buyer has to make the determination that, even with the share premium he will likely need to pay, the juice is worth the squeeze,” he said regarding his firm’s purchase alongside Elliott Management. “My sense is many buyers might see value [in taking REITs private], but are hesitant – somewhat understandably – to then take the next step.”
Rithm CEO Michael Nierenberg explained his company’s strategy during an analyst call: “The overall entry point on the underlying assets at what we think are very, very attractive values.” Another executive highlighted positive trends for New York City offices: “There’s no new construction, 10 percent of the inventory is coming offline with the conversions. And the return to work phenomenon is back now 4 to 5 days a week.”
Despite these positive signals for some markets like New York City—where vacancy rates have fallen and leasing activity has improved—the national office vacancy rate remains near 20 percent according to recent industry data (https://www.cbre.com/insights/figures/us-office-figures-q1-2024). Few investors are willing or able to commit significant capital needed for such deals.
The role of office landlords has also changed significantly since before Covid-19. In major cities like New York, attracting tenants now requires more than just maintaining clean common areas; amenities such as podcast studios or golf simulators have become important differentiators for prospective tenants.
For those investors able to acquire properties at low cost bases and invest further into upgrades while waiting out market cycles, there remains potential for strong returns if conditions improve.
