Office Market, Q1 2018

Office Market: Prices per Square Foot by Region

The top 50 U.S. metros average sales price per square foot increased 7% in the first quarter of 2018 from $293 to $314; however, the average sales price was 2% lower than the first quarter of 2017. The U.S. Metro average – the black trend line in the chart below – is somewhat consistent with the decline in the office cap rate [KL1] following a rise in the previous quarters. Since the first quarter of 2013, the average sales price has increased 20%, but it is down from a peak of $386 per square foot in 2016.

The Northeast, represented by the purple line, shows considerable volatility both with and without the inclusion of New York City trades – the dotted purple line includes the Northeast excluding New York City. The average sales price per square foot in the Northeast increased 23% in the first quarter after having fallen dramatically in the third quarter of 2017. Much of the jump can be attributed to the $2.4 billion sale of Chelsea Market that Google purchased for more than $2,000 per square foot.
The current Northeast average sales price is 4% higher this year than in the first quarter of 2017, and is 6% higher than in the first quarter of 2013. The dotted purple line shows much lower prices per square foot in the last two quarters, but these low averages are based on very low volume.
The West was the only region that saw a decline – 13% – in the average sales price from the previous quarter; it was also 21% lower than the first quarter of 2017, but 30% higher than in the first quarter of 2013. The other three regions saw sales prices increase in the first quarter of this year. The average sales price in the Midwest was the highest since 2015 and is up 35% from five years ago. Average sales prices in the South Atlantic also peaked in the first quarter of 2015 before falling and were 5% higher than a year ago.
In the Southwest, prices jumped in the quarter but are lower than in 2016 when they topped $300 per square foot, twice. The largest trade in the first quarter was the $800 million Infomart in Dallas that sold for $500 per square foot. One would also assume that the higher first-quarter price in the Southwest reflects the higher oil prices; however, oil prices bottomed in early 2016 when the average sales prices were highest. Thus, even the average sales price per square foot numbers have selection bias.

Office Market: Sales Volume by Region

The below chart helps to shed some light on the office sales prices per square foot volatility. First, the sales volume for the Northeast outside of New York was so low in some quarters that we did not include it in the chart. In fact, in the last two quarters, the non-New York Northeast region had particularly low office sales volume. Likewise, the low volume numbers for the Southwest region shows that the average prices reflect a handful of bigger sales. Sales volume in the Midwest was remarkably steady over the last five years. In the West, however, volatility has been more constant. Volume spiked in the fourth quarter of 2016 due to a number of high-profile sales, including Foundry Square II in San Francisco that traded for $1,200 per square foot and The Bluffs in Los Angeles that traded for close to $900 per square foot. Volume jumped in the fourth quarter of 2017 when State Farm sold its Tempe, Arizona office building for more than $900 million, roughly $450 per square foot. Finally, in the Northeast, volume has held rather steady at approximately $4.4 billion for most of the last six quarters, but this contrasts with previous years when volume moved like a yo-yo.