Institutional Capital Is Targeting Single-Tenant Office as a Flight to Safety

Single-tenant office properties are serving as a flight-to-safety for institutional office investors. A webinar from Green Street tracked the post-COVID deal flow highlighted the trend. Institutional capital is attracted to the stable income and long-term tenancy of single-tenant properties as a hedge against downside risk, and they are willing to pay big for properties that fit the bill.

Richard Quinn, managing editor of Commercial Mortgage Alert & Real Estate Alert News called the HQ at First transaction in San Jose the “poster child” for the trend. KKR purchased the property from Monterey Trust for $535 million, a record at the time. Interestingly, Monterey Trust purchased the property pre-pandemic in 2019 for $429 million, showing that the asset continued to appreciate through the pandemic, despite the destabilization in the office market.

“This shows where people want to be,” said Quinn in the webinar. “In hot markets, these are the deals that are trading. The price differential is not only above where we might have been during the trough of the pandemic, but there is such a turnaround from the price valuation in 2019. You are really seeing where the money is gravitating. This is telling you where institutional money is starting to look.”

One Memorial Drive in Cambridge is a similar example of this trend. MetLife and Norges Bank purchased the property for$825.1 million, another record-breaking deal. Although the property isn’t single-tenant—it is leased to two long-term tenants—Quinn says that it still aligns with the trend as a flight to safety. “This is where institutional capital sees safety and is willing to put money to work,” he said.

Most of the office transactions this year have focused on this type of product, according to Cedrik Lachance, EVP and director of research at Green Street, who also spoke on the webinar. “This is really where the bulk of the activity has been. I think that it is about seeing through the pandemic and getting to the other side with something that is income producing,” said Lachance, noting that the cap rate on the Cambridge deal was 4.1% and the price per square foot is impressive.

This trend has also driven investment to new markets. Most notably, New York is no longer the top investment market for office. As Quinn notes, this is likely because New York has limited single-tenant properties. Instead, capital is now heading to Smile State markets, like Atlanta, Phoenix and Raleigh. This year, those markets have seen record after record in pricing.