Office Capital Market Update, Q3 2019

National Cap Rate Trends


National Office Market: Cap Rate Trends, 2014 Q3 – 2019 Q3

Source: REIS, Real Estate Solutions by Moody’s Analytics


The average office cap rate increased slightly to 7.0% from 6.9% in the previous quarter. The 12-month moving average was unchanged at 7.1%. Although this chart looks volatile, note that the average cap rates over the last five years fall within a 110 basis point range. This means that cap rates have not climbed or fallen too dramatically over this period, and the 12-month rolling average is especially flat. These trends show a stark difference from the apartment cap rate trend that has fallen consistently. The office market has not seen the same investor interest as it has in previous cycles.

Again, these cap rates are in line with fundamental trends. Office rent growth was just 0.7% in the third quarter and 2.7% over the year, or just above the rate of inflation. The overall vacancy rate was unchanged at 16.8%, which is still remarkably high given how deep we are in the current expansion. Construction remains moderate compared to past cycles, and as tenants lease fewer square feet per employee, investors have been very cautious about investing in office properties. We should also mention that the gap narrowed this quarter. Only 3 metros incurred a quarterly rent decline, down from 8 metros in the second quarter.


Average Price per SF


National Office Market: Average Price per SF, 2013 – 2019 Q3

Source: REIS, Real Estate Solutions by Moody’s Analytics


The chart above shows the average price per unit for the top 50 metros as well as the top 10. For the office market, the top 10 metros are New York City, Los Angeles, San Francisco, San Jose, Suburban Virginia, Seattle, Chicago, Boston, Atlanta and Washington, DC. These metros account for 60% of the volume in the top 50. This chart differs slightly from the cap rate chart in that average prices increased slightly in the quarter for the top 50 metros from $321 per square foot to $335 per square foot. However, note how the average price in the top 10 metros declined after rising dramatically in the second quarter. The decrease equated to $18 per square foot. You might also notice that in the trend lines that the average prices have increased steadily over the last six years, but not nearly as dramatically as the apartment trend lines showed. Still, average prices have climbed 11% over the last year, for the top 10 metros, and 16% for the top 50.

However, a handful of transactions accounted for most, if not all, of this increase and only one of these trades involved Google. You may recall in the previous quarter that Google bought three large office properties in Mountain View and New York City. In this past quarter, Google bought Yahoo’s former headquarters in Sunnyvale California for $838 million or $823 per square foot. In downtown San Francisco, Jamestown Properties purchased Levi’s Plaza for $820 million or $1,000 per square foot. While on the east coast in New York City, the Coca Cola building at 711 Fifth Avenue traded for $909 million or more than $2,500 per square foot. This included very high-priced Fifth Avenue retail space as well.

Without these three significant transactions mentioned above, the average price for the top 50 metros would be $26 lower or $309 per square foot, and the average price for the top 10 metros would be $50 or lower at $343 per square foot, in line with previous quarters. In short, outside of a handful of large acquisitions, the office investment market would look little changed from previous quarters. This shows that investors are still interested in top-of-the-line office properties.


Sales Volume


National Office Market: Indexed Transaction Volume, 2013 – 2019 Q3

Source: REIS, Real Estate Solutions by Moody’s Analytics


As this chart shows, after rising sharply the previous quarter, volume decreased just a bit in the third quarter. The number of office trades fell to 674 from 750 last quarter and 773 trades in the third quarter of last year.

A number of individual markets saw noticeably higher volume in the third quarter besides New York, San Jose, and San Francisco. In Boston, 75 State Street sold for $635 million, or $750 per square foot, and in Washington DC, 815 Connecticut Avenue sold for $231 million or just over $1,000 per square feet.

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.

Copyright © 2019 Reis, Inc.


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