Office Capital Market Update, Q3 2018

Office Market: National Cap Rate Trends



The average office cap rate fell to 7.0% from a rate of 7.6% in the second quarter (the peak rate of the last five years).  Office cap rates have seen far more volatility than apartment cap rates over the last three years.  The 12-month rolling average fell slightly to 6.9% from 7.0% last quarter. The fact that office cap rates in 2018 have decreased from rates seen in 2017 and 2016 is surprising given how interest rates have increased – but again, we caution that the data is subject to selection bias. Additionally, note how the red line has generally been flat over the last five years, indicating that office cap rates have not changed dramatically since 2013. This is in sharp contrast to apartment cap rates, which have declined steadily.

One could look at the numbers and conclude that these cap rates are in line with fundamental trends. In Reis’s recent Quarterly Briefing, Dr. Victor Calanog discussed how office rent growth increased by just 0.4% in the third quarter and the overall vacancy rate was unchanged at 16.6%. The vacancy rate is unusually high given how deep we are into the current expansion and how moderate construction has been compared to past cycles.  Tenants are leasing fewer square feet per added employee and, as a result, investors have generally not preferred this asset.


Office Market: National Sales Volume Trends



The overall volume for office transactions climbed in the third quarter to $23 billion from $18.9 billion dollars in the second quarter.  For the top 10 metros, volume climbed 15% in the quarter after falling in the second quarter. Likewise, for the remaining 40 metros. That said, overall sales volume in 2018 is well below that of 2015 through 2017, especially in the top 10 metros. This is why cap rates have not moved much: investors have gotten more discerning, buying more high-end properties and fewer lower-end properties in large cities.  The average price per square foot increased to $287 – the highest in two years. For the five largest office transactions, the average price paid ranged from $750 per square foot to more than $1,200 per square foot. The latter value was for the Santa Monica Business Park and the Campus at Playa Vista, both in Los Angeles. Office sales volume fell a bit in New York City, as did the average price paid per square foot.  That said, fewer prominent buildings sold in the quarter, unlike in the second quarter when the ABC network’s headquarters traded for close to $1 billion.

We do not expect to see sales volume of office properties to increase significantly in the next few quarters…except maybe for Queens, NY and Crystal City, Virginia. We will address that when those sales occur.


Analysis by Barbara Byrne Denham. Denham is a Senior Economist in the research and economics department at Reis, the team responsible for the firm’s market forecasting, valuation, and portfolio analytics services. Throughout her 20-year career, Barbara has written a number of white papers on the commercial real estate market.