Demand for High-Quality Urban Product is Driving Office Investment
The average urban office sales price has risen to $429 per square foot, a 4.5% increase over 2020.
Office investors remain on the hunt for high-quality product as we approach the midyear mark, with many holding off for the pandemic’s end and more clarity around how companies will use office space going forward.
The overall vacancy rate across the top 50 US markets remains at about 15.6%, according to the latest data from CommercialEdge, while average leasing rates ticked up 0.4% year-over-year. And against that backdrop, high-quality assets in urban submarkets—defined as those outside CBDs but still within the urban core—have emerged as the most intriguing for investors, pushing the average urban office sales price to $429 per square foot, a 4.5% increase over 2020.
Four of those sales—in Boston, San Francisco, Manhattan, and Dallas—account for $3.8 billion in transaction volume this year, nearly 17% of all sales nationwide. And transactions closed during the first five months of the year totaled $22.5 billion, on par with the total office sales volume recorded last year.
“Some buyers are wary of increased vacancies and a workforce that has largely embraced remote work, while sellers are hesitant to offer discounted sale prices when the outlook for office is so unknown,” CommercialEdge analysts write in a recent national report breaking down office trends. “Despite this wait-and-see approach, there is still available capital and investor interest in certain properties.”
Medical office space, labs, and life science office properties have also driven investment this year, with marquee deals including Alexandria Real Estate Equities’ purchase of 401 Park in Boston’s Fenway area and the sale of Archway Medical Plaza in Los Angeles at $1,488 per square foot.
Employment in office-using sectors increased in April, but only a few of the markets surveyed by CommercialEdge have seen office-using employment fully recover. Only 19 of the 120 markets covered by CommercialEdge currently have more employment in office-using sectors than in February 2020, and of those, only two—Austin and Tampa— are in the top 25 largest markets.