Office Rents Are Down, But Investors Keep Chasing Trophy Assets
High-quality and high-potential office assets have maintained investor appeal throughout the pandemic.
Asking office rents stalled in August at an average of $38.72 per square foot across the 50 largest U.S. office markets surveyed by Commercial Edge in a recent report, with national average values increasing just $0.10 over July figures.
Full-service equivalent listing rate averages for the markets Commercial Edge ranks ranged between $21.93 per square foot and $83.91 per square foot in August, with the highest year-over-year increase recorded in Tampa at 13.1% growth. Listing rents in Los Angeles followed at $41.42 per square foot, a 6.6% increase year-over-year.
On the flip side, office space asking rents in Seattle averaged $36.01 per square foot last month, a 1.5% year-over-year decrease, followed by San Francisco ($69.33 per square foot and a 1% decline) and Houston (which logged a 0.4% year over year increase to $30.29 per square foot).
While the rental market remains tepid, however, “high-quality and high-potential office assets have maintained investor appeal throughout the pandemic,” Commercial Edge notes, with office transactions totaling $45 billion so far this year.
“One month shy of what is usually a busy fourth quarter for sales, office deals have already surpassed last year’s totals for the second and third quarters combined,” the report continues. And office properties are selling for more: the deals Commercial Edge analyzed traded for an average of $287 per square foot, a number that’s been steadily climbing since 2017 despite the pandemic. Manhattan tops the price per square foot list, with sales averaging $1,192 per square foot, followed by the Bay Area, where the average price per square foot clocks in at $584.
Last week, Marcus & Millichap CEO Hessam Nadji told CNBC that investors are “looking beyond this current cloud” and are aggressively scouting investment opportunities. Nadji said more than $5 trillion in excess capital will eventually get released into the market.
“Even buyers of office space—they’re not out of the market,” he told CNBC. “They’re in the market, taking advantage of low interest rates way ahead of the recovery in every property type.”
Single-tenant assets sales in the office sector nearly doubled year-over-year, according to Colliers research. That’s the largest jump of the three major asset types. Median cap rates also continued to compress for office STNL assets, ending the first half of the year at 6.1%.