Commercial Real Estate

Office Investment Remains Robust, With More Markets, More Property Types Showing Improvements

Preliminary data for the first quarter of 2011 commercial office space sales have come in strong. However, not all markets and property classes are performing equally — top-quality assets in the top five markets continue to garner more investor interest and stronger rebounds in values.

CoStar Group expects total sales volume for office space could approach $15 billion during the first quarter. New York and Washington, DC, have each posted about $2 billion so far in office sales volume in the first quarter. The average year-to-date price/square foot in those markets as well as in San Francisco, Los Angeles and Boston all came in at more than $300 per square foot. Meanwhile prices for office buildings averaged less than $100/square foot in Tampa/St. Petersburg, Chicago, Philadelphia, Atlanta, Detroit and Phoenix.

When it comes to how well commercial properties are leased, investors are beginning to look more towards future income growth by targeting properties with higher vacancies.

Pricing for office properties with minor leasing exposure has started moving up substantially. The weighted average price per square foot for office properties that were 70%-90% leased came in at more than $200/square foot - doubling from last summer. Prices for office buildings 90% occupied or higher started to level off to just less than $250/square foot.

Year to date, REIT and public investment funds and institutional funds have been net buyers each completing about $1.5 billion of net buying, with institutional funds being the most active buyers in total. Private investors, private equity funds and users were all net sellers in the quarter.

Office property sales volume performance and pricing will largely depend on the individual market. Major gateway markets have attracted the most investor interest, but investors are beginning to look for high quality buildings for sale in second-tier markets as well. Also the size of the buildings for sale and how leased (or vacant) the asset is will also have a major influence on its value in the current market.

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