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Improving fundamentals is driving investors back into the office sector

Last Thursday, Howard Hughes Corp. Equity sold a stake in the 1.5-million-sq. Office tower at 11 Wacker Drive in Chicago. At $210 million, the transaction price would put the valuation of the building at over $1 billion, the highest valuation for an office building in Chicago since the sale of Willis Tower to Blackstone in 2015. This deal marks the continuation of the One. The trend began back in late 2021, when big-name investors began picking up Trophy Office properties at very healthy valuations.

Two years after the pandemic closed offices around the world, many workers still haven’t returned full-time. “Everyone has an opinion of what a ‘return to office’ will look like, but no one really knows,” says Texas-based Russell Ingram, vice president of capital markets with commercial real estate services firm CBRE. “Yet most investors remain optimistic on this asset class and have determined how they want to bet Office.”

According to real estate data firm Real Capital Analytics (RCA), in February, the most recent month for which data is available, sales of office investments in the US totaled $6.6 billion, a 99 percent increase compared to the same period in 2021. The average closing cap rate during the month stood at 6.3 per cent for multifamily and industrial assets, but well below the average for hotel trades.

In Ingram’s view, almost all US markets are likely to see higher trading volume for office properties in 2022 than in 2021. But he noted that the primary players in the market have mostly switched from institutional buyers to private capital and value-added funds.

“Office investing today is heavily biased towards private buyer groups, as institutions shift their key sector acquisition priorities to industrial and multi-family,” says Al Pontius, senior vice president and national director of the Office & Industrial division at commercial brokerage Marcus & given more importance.” Millicap. “For entities, they will look very selectively on office buildings that are modern, best-in-class assets that they anticipate to compete favorably to top companies in primary markets.”

Office REITs and offshore buyers, who have made some acquisitions across the country in recent months, are also active, according to Ingram. However, he says he likes it about the type of property he wants to pursue. According to Lauro Ferroni, senior director of research, capital markets with commercial real estate services firm JLL, capital from Canadian, German, Singaporean and South Korean investors has done well to lease American office property, particularly in gateway markets, and trophy products. continues to target. Or top speed secondary market.

what kind of deals are happening

While CBRE’s investment sales figures for the first quarter are not yet available, Ingram says he has seen an uptick in deal volume. “The most active deal type has shifted from single-tenant to value-added deals,” he says. “While value-added funds are looking to infuse capital, we are seeing large amounts of private capital and high-net-worth (HNW) investors helping create a market for this asset.”

Looking at closed-office investment sales in Texas, Ingram says there have been more sales so far in 2022 than the same period in 2021. JLL’s Ferroni agrees, noting the significant increase in investment activity, especially associated with high-quality office buildings. New developments that have completed their lease-up period, the owners are now looking to sell.

In addition, investor interest in single-tenant, net-lease office assets remains strong, with these transactions accounting for a higher proportion of overall activity than before the pandemic, notes Ferroni. According to Ingram (although sometimes strong positions can still elicit investor interest for older buildings), sales execution for older, commodity buildings that require repositioning is the world’s best selling price for quality. attaches importance.

Waiting to monetize an asset two years into 2022 created more office sellers, he noted, and typically the greatest sales volume is in markets where there are the most willing sellers. He notes that Houston, for example, is seeing a significant increase in demand from investors as a greater number of owners prepare to monetize their office investments and move forward.

“There were several owners who were getting ready to sell in late 2019 and early 2020, but their plans were hampered by the Covid-19 lockdown. No doubt some of the lost tenancy had to be returned and it takes some time,” he says. Now, with tenants signing leases again, investors can underwrite lease-ups, bringing liquidity back to office buildings.

According to Ferroni, with the improvement in property fundamentals, open-end diversified core equity (OCDC) funds, which are active on the sell side, are expected to initiate select acquisitions in the coming months. In addition, the yield contraction on industrial and multi-family acquisitions is increasingly positioning office property as a higher-yield option, she notes.

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