A funny thing has happened to the US office market. Fewer investors seem to be enamored of trophy office buildings in CBDs than in the past.
Whether this is because there are too few of these prize properties available, or the prices are too high and the cap rates too low, according to the Real Capital Analytics’ US Capital Trends report for the office market in August, suburban office properties are outshining their city cousins.
Sales of significant office properties in the US, those with price tags of $2.5 million or greater, totaled $5.3 billion in August, according to RCA, slightly below June and July levels but 6 percent higher than a year ago. The report also shows that CBD office sales’ volume had fallen for five straight months, while suburban office properties had impressive year-over-year gains.
Cap rates on recent office sales were slightly higher, probably the result of a slow migration of investors into a greater diversity of markets, according to RCA. But lower cap rates should result from recent declines in commercial mortgage interest rates. Office prices overall have flattened out in recent months, although appreciation for CBD properties continues. Prices for single-tenant and medical office buildings have performed very well recently.
Cap rates in CBD submarkets at the end of the summer averaged 6.5 percent and had been as low as slightly below 6% earlier this year, while cap rates for the suburban office market averaged almost 8%. The average price per square foot was roughly $350 for CBD properties compared to approximately $175 per square foot in the suburbs. The total volume of CBD office building for August was a little over $2.5 billion, while suburban office volume was roughly $3.5 billion.
There was a year-over-year improvement for the suburban office market in transaction volume of close to 75%, while the CBD market registered a slightly lower volume than August 2011.
While most suburban office sales tend to be small, under $20 million, this is not always the case. The 10-year-old Crescent at Carlyle in Alexandria, Virginia with 210,000 square feet of rentable space, was sold in July for almost $110 million, or $522 per square foot, and was 100% occupied at closing. And, in August, the 365,000 square foot Southpoint Office Center in suburban Minneapolis sold for almost $45 million, or $122 per square foot.
In other office news for August, individual property sales remained strong while portfolio sales accounted for only $221 million. Distressed transactions have been declining and represented 15% of the number of properties sold and just 7% of total volume in August.