Single-Tenant Office Sales Take a Deep Q3 Plunge

Office has had a tough time, with effects of hybrid workplace strategies and also a deteriorating credit outlook through 2025.

And so, it should not be surprising that according to Northmarq, the $1.78 billion in investment sales during the third quarter were down 31% from the second quarter and a decline of 63% year over year.

According to the company’s data, annual sales show a starker pattern. In 2019, investment sales were $29.2 billion. In 2020, about $19 billion. There was a surge again in 2021 to $29.8 billion. In 2022, that eased back to $22.6 billion. However, 2022 saw a slowdown again $22.6 billion. Through third quarter 2023, however, the total has been $5.7 billion. There might be a fourth quarter jump, but it would have to be massive to bring the total up.

There are some clear reasons, like the high costs of refinancing because of rising interest rates which puts significant financial pressure on property owners, as GlobeSt.com has repeatedly reported for a good 18 months now. Beyond interest rates, utilities, insurance, and taxes have seen major jumps in rates, adding more pain to owners.

There have been many industry sources saying how tenants are focusing, when possible, on downsizing to some degree and moving more heavily into Class-A and trophy office spaces. If a given older building owner wants to upgrade, if even possible, to bring in clients, financial challenges will require capital that otherwise might be available for refurbishment, keeping it in a non-competitive state.

As demand drops and transaction counts fall, typically average cap rates will rise. The Q3 figure for single-tenant net lease was 6.63%. That’s up from 6.38% in 2023 Q2, 6.26% in 2023 Q1, 6.13% in 2022 Q4, and 6.05% in 2022 Q3.

On an annual basis, average cap rate in 2019 was 6.26%, 6.25% in 2020, 6.21% in 2021, and 6.13% in 2022. Year to date 2023 is 6.63%.

According to Northmarq, there’s been a shift in the mix of buyers since 2020. Domestic private buyers have gone from 35% of the total to 49%. International buyers are down from 12% to 4%. Domestic public REITs, up from 10% to 14%. Domestic institutional is down a bit from 28% to 26%.

One point that Northmarq makes is that the reality of office “is likely less dramatic than some may suggest.” Values are falling, tenants are giving back unused space, and some owners are considering conversion to other uses. “But to suggest that office is beyond repair or irredeemable is simply reckless,” they wrote. “This is not the first time commercial real estate investment activity has declined substantially, nor is it the first time owners have been faced with the threat of distressed loans or high vacancies. The future of the office sector may be unknown or unclear right now, but that’s normal during any transition period.”