Commercial Investment Real Estate March/April 2018 | Page 26

Investors expand their foothold in
office secondary markets and suburbs
in the search for higher ROI.
by Beth Mattson-Teig
24
March | April 2018
Better Yields
Cap rates in the gateway markets have dropped below
6 percent, which makes it very difficult to build in
enough income growth or underwrite at a low enough
exit cap rate to achieve the double-digit IRRs that
investors expect to see, says Gary Lyons, CCIM,
SIOR, senior vice president, Investment Sales Team at
Avison Young in Raleigh, N.C.
“They are naturally migrating to secondary mar-
kets,” he says. During the first three quarters of 2017,
office sales in major metros reached nearly $50 million,
which was down 16.5 percent compared to the same
period a year ago, according to Real Capital Analytics.
In comparison, sales transactions in secondary markets
increased 8.3 percent to $38.6 billion.
Investors have taken notice of the strong fundamen-
tals in Raleigh-Durham, N.C. The metro is continuing
its solid recovery, with annual absorption that surpassed
800,000 square feet in 2017, and office rents that are
rising at a rate of 5 to 6 percent in both Class A and
Class B sectors.
“The amount of institutional capital in our market is
higher than it has ever been,” Lyons says. “There are a
I
nvestors have plenty of capital to spend and a
desire to grow office portfolios — and more of
that capital is moving away from major metros.
The economic recovery that has been slower to
trickle down into secondary and tertiary markets is
gaining traction, and investors clearly are taking note
of that market shift.
As a result, investors have started shifting to second-
ary markets, such as Las Vegas, because the gateway
markets really have topped out for market pricing and
property values, notes Soozi Jones Walker, CCIM,
SIOR, president and broker at Commercial Executives
Real Estate Services in Las Vegas.
“Bigger institutional investors are coming to our
market to look for higher yields,” she says.
The Las Vegas metro was hard hit by the Great
Recession, but investors now recognize that property
values have bottomed out and have started to rise. In
Las Vegas, office vacancies have dropped to about
13 percent and are still improving, along with an
increasingly diverse economy, Jones Walker notes.
Investors seem to have “pots of money” even for Class
B assets in secondary markets, she adds.