“Reflecting these strong fundamentals, investment capital is shifting to secondary office markets, where properties are generally undervalued,” said Noble Carpenter, Cushman & Wakefield president, capital markets, Americas. “Gateway market office volumes peaked in 2015 and are now declining, while secondary Sunbelt office market investment sales volumes continue to rise. We project these trends will continue through 2019.”

Citing Real Capital Analytics' Commercial Property Price Index, Cushman & Wakefield says that gateway office prices were 70% above their previous cyclical peak as of this past June, while secondary markets are 8% above their previous peak. Undervaluation extends to cap rates, too: in the previous cycle, the spread between gateway and secondary Sunbelt office market cap rates averaged 105 bps, but has since expanded to 163 bps on average. In recent quarters, though, the spread has begun to compress.

The continued undervaluation occurs at a time when the gateway markets have a construction pipeline equal to 3.3 times the annual average absorption over the past two years, as compared to only 1.3 times for the secondary Sunbelt markets. The pattern persists when looked at relative to inventory, Cushman & Wakefield says. Office product under construction in the gateway markets amounts to 2.7% of inventory as opposed to 2.1% in the secondary Sunbelt markets.

“Secondary Sunbelt markets continue to offer highly attractive yields on a risk-adjusted basis, with upside from further cap rate compression at a time when many asset classes, particularly Gateway-market office, are fully valued,” says David Bitner, senior director and head of Americas capital markets research at Cushman & Wakefield. “We see a wave of investment opportunity in secondary office markets, particularly with suburban assets, which have stronger momentum and have been less picked over by investors so far in this cycle.” Since 2010, 72% of CBD office inventory has traded, compared to just 65% in the suburbs, he adds.