Commercial Investment Real Estate March/April 2019 | Page 30

Trends in Office
Volume & Pricing
Average
Price Per SF Average
Cap Rate
$203
$214
$226
$231 7.2%
6.9%
7.1%
7.1%
$220
$240
$239
$221 6.9%
7.0%
6.9%
6.7%
$277
$235
$243
$243 6.8%
6.7%
6.8%
6.7%
$263
$272
$232
$263 6.6%
6.6%
6.4%
6.7%
$256
$264
$228
$240 6.7%
6.5%
6.6%
6.7%
$261
$244
$272
$277 6.6%
6.6%
6.6%
6.6%
2013
Q1
Q2
Q3
Q4
2014
Q1
Q2
Q3
Q4
2015
Q1
Q2
Q3
Q4
2016
Q1
Q2
Q3
Q4
2017
Q1
Q2
Q3
Q4
2018
Q1
Q2
Q3
Q4
Source: Real Capital Analytics
Suburbs Offer Higher Yields
Given the broader trend of urbanization sweeping the
country, institutional capital is exhibiting a preference for
central business district assets. Yet investors are finding
more attractive yields in the suburbs. As of 4Q 2018, sub-
urban cap rates were averaging 6.8 percent versus 5.2 per-
cent for CBD assets, according to RCA. However, inves-
tors also are more selective when buying in the suburbs,
often avoiding outliers and instead choosing suburban
assets in an attractive location with sustained demand and
good transit infrastructure and amenities.
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March | April 2019
For example, the Omaha, Neb., market has seen capital
flowing to suburban office over the past year. “We are a
small enough market that I don’t think you can extrapo-
late a trend between suburban and CBD office, but office
investment in general is definitely up in the past few years,”
says Ember Grummons, CCIM, an investment sales bro-
ker at Investors Realty in Omaha. Interest in and pric-
ing for suburban multitenant office buildings continue to
increase, he adds. For example, Grummons represented
the seller in the sale of North Park Buildings 7 and 8,
located just west of Omaha’s I-680 loop, in a sale that
closed last June for $22.3 million, or $126 per sf. The
neighboring buildings, North Park Buildings 4 and 5, sold
in early 2017. The more recent sale garnered a cap rate
almost 200 basis points lower and a price per square foot
that was 22 percent higher.
The 10-year Treasury rose approximately 50 basis points
during the period between the two transactions, making
the comparison between the two sales even more dramatic,
Grummons notes. “I believe the improved pricing is due
to a combination of factors — increased buyer demand for
multitenant office, improving fundamentals in North Park,
and the dramatic increase in the costs of new construction,
which makes the cost per square foot of existing property
look attractive in comparison,” he says.
The suburban markets around Dallas-Fort Worth con-
tinue to be a seller’s market for smaller office and medi-
cal office properties. “Right now, there is a ton of 1031
money, and a ton of brokers are scratching and clawing to
get off-market listings because the inventory of investment
properties in Dallas-Fort Worth is so thin that it’s hard to
find properties to buy,” says Russ Webb, CCIM, owner
and managing partner at Silver Oak Commercial Realty
in Southlake, Texas.
Cap rates are still very low, even with interest rates going
up, Webb says. “We’re seeing mom-and-pop medical office
building owners selling properties at 7.0 to 7.5 percent on
triple net leases with local credit tenants.” Some owners are
reluctant to sell, though, because they don’t have anything to
exchange their property into, he adds.
One reason that investors have kept their foot on the
gas for acquisitions is that even with some softening in
fundamentals, the outlook for office is still positive. “The
office market cycle is in the late expansion phase and pos-
sibly near the peak, but I do see demand growth — at least
for the foreseeable future — for office using employment,”
Cypert says. Cap rates are likely at or near the bottom in
most markets. However, investors remain fairly bullish on
the office investment market, even if that means being
mindful of potential risks ahead and working harder to
find good investments.
Beth Mattson-Teig is a business writer based in Minneapolis.
COMMERCIAL INVESTMENT REAL ESTATE