"It's not a great surprise," he tells GlobeSt.com. "There is a continued flight to quality."
New York, Los Angeles--including Orange County--Boston, Chicago and Washington, DC continue to account for the majority of all office investment activity nationally. According to Granite, these five markets accounted for 59% of all investment activity year-to-date 2003, which is a significant increase above 2002, when these same markets accounted for 53% of all investment volume. However, two transactions skewed the statistics for total investment volume recorded year-to-date. The recent sale of the GM building and the sale of the John Hancock portfolio in Boston earlier in the year accounted for $2.3 billion, or 8.8% of the $26.1 billion of total transaction volume recorded during the first three quarters of 2003.
Granite points out that the office investment remains highly competitive with all sources of capital active in the market. However, cap rate compression and low interest rates have made it increasingly difficult for equity funds, REITs and offshore buyers to compete with private REITs, such as Wells, Inland and CNL, and high net-worth investors. Interest rates remain the primary driver for real estate investment activity with rates and spreads at historically low levels.
The average price paid per sf for CBD office transactions during the quarter was $205 per sf, which remains well below the peak of $240 per sf paid in the middle of 2002. Granite found that pricing for suburban transactions, which declined precipitously to $140 per sf during the first quarter, has rebounded to an average of $152 per sf during the past two quarters, which is roughly equal to the average suburban pricing recorded during the past two years.
"The private REITs are the most active buyers--they're aggressive," Milston adds. "They appeal to people who lost a lot of money in the stock market." He cautions that when there is an economic turnaround, people will look to get back into the stock market to chase high returns and transfer money from the private REITs.
Increased business activity has not fueled economic growth of late--government allocations and consumer spending have. Granite points out that conflicting signals abound regarding the current pace of the US economic recovery. "People will always go with the product types where they see yields," Milston offers. "Every 12 to 18 months, something else is in vogue.
And what's in vogue now is the retail market which continues to attract investors. Granite predicts that due, to frenetic activity in the mall sector 2003 will go down as the year of the mall with respect to real estate investment activity.
"Eighteen to 24 months ago, you couldn't give malls away," says Milston. "Now there have been eight to 10 $100 million plus transactions."
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