The Numbers Behind the Flight to Quality Office Assets

As the office market recalibrates and the pandemic wanes, a flight to quality is playing out in a plethora of markets. 

Take One Vanderbilt, for example: the 1.8 million-square-foot Class A+ tower in Manhattan is 90% leased after delivering in 2020. Another prime example? Boro Tower in Northern Virginia, which is situated inside a 15-acre mixed-use development that’s 80% leased.

A new report from CommercialEdge notes that investor interest in quality assets has led to a widening spread in average sale prices across asset classes since the pandemic dawned in 2020. Class A buildings, on average, cost $50 more per square foot (15%) in the fourth quarter of 2021 than 2019, while Class B buildings have only increased $6 per foot (6%) over that time. Atlanta’s 725 Ponce deal is a case in point: last year the building sold for $300.2 million, an average of $807 per foot, the highest average price per foot CommercialEdge has ever recorded in the market. 

A total of $12 billion in office transactions were recorded through the end of February, with an average national sale price per square foot rested at $284, it found.

“For Class B and C buildings, the flight to quality will present challenges, but also opportunities,” CommercialEdge analysts note in the report. “Some lower-quality assets will become prime targets for conversions, especially in markets where land is at a premium.”

The firm points to Duke Realty’s $34 million purchase of an office fully leased to Raytheon in Orange County as one such example. Duke will demolish the building and develop an industrial property once the Raytheon lease expires this summer.

“Most offices are not suited for industrial conversions, so demolishing office buildings may become a common tactic in markets where developers feel they can leverage a good location,” the report notes.