Office Sales Volumes Is Up But PSF Is On the Decline
You might think that greater demand would mean higher prices, but this isn’t a normal market.
In one part of its Fall 2022 Sentiment report, LightBox had noted inflation and recession concerns for CRE investors. When it came to an office sector analysis later in the document, though, maybe the concern should have been for the basics of economics, because one dynamic on the surface seemed odd.
As LightBox mentioned, a first half of the office sector in 2022 compared to the same time period in 2021 showed a peculiar dynamic: volume significantly up and, in a number of markets, prices significantly down.
“While sales volume increased in all markets except The Bay Area, several markets saw PSF pricing decline,” the firm wrote.
Specifically, on a national basis, there was $52 billion in transactions in 2022 compared to $36.9 billion in 2021, according to data from CommercialEdge that LightBox examined. The average price per square foot was $265 this year, $288 last.
Breaking this down for five big metros, the Bay Area say total deal volume drop from $4.8 billion to $2.64 billion while prices went from $584 per square foot to $491. Seems reasonable; if activity goes down, you might see that as less demand and so prices would drop.
Next up, Boston: amount of total office transactions pretty flat at about $2.5 billion, but square foot prices of $512 in 2021, $440 in 2022. L.A. saw something of a reversal—$1.3 billion at $343 per square foot in 2021, $482 per square foot and $2.3 billion in total transactions. Manhattan: $2.4 billion in total to $2.85 billion with price slipping from $1,192 to $892. And then, Seattle, prices went up 38.9% from $343 to $482 as volume gained from $1.8 billion in 2021 to $2.33 billion this year.
The drops listed don’t necessarily convey the fall from property high points because the pricing is taken over a half year. Take Manhattan, where the average Q1 pricing was $921 and that of Q2 was $880. Compare the latter figure to midyear pricing of $1,249 per square foot in 2021, a 70% decrease.
“This is a reflection of the softening office investment market as investors reprice assets to fit market conditions,” said LightBox, and technically that is true. But that is the what, not the why. In some of these places, such a repricing looks like a fire sale—another term for asset repricing, only one that might send more of a chill up the back.