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Uptick In Class A Office Sales May Portend Stronger Office Investment Activity

 

Investors Expect Deals Will Continue Spreading to Outlying and Secondary Markets and Risk Profiles
After surging sale prices caused them to fall a bit out of favor with investors, Class A office buildings may
again set the pace for an improved outlook for investment sales through the end of the year.

The monthly sales volume of Class A office buildings began to edge down in November 2011 when the
average price per square foot achieved a post Great Recession high of $263 per square foot. Monthly
sales volume hit a nadir in May 2012, according to data from CoStar COMPs, as the robust price
appreciation drove investors to seek out other property investment alternatives.

More recently, monthly volumes of Class A office sales have rebounded after average-per-square-foot
prices fell to about $248 per square foot.

According to analysis from Jones Lang LaSalle, renewed investor interest in Class A office property in the
first half of 2013 was bolstered by overseas investors, who arrived on the scene to take out domestic
buyers who had taken advantage of discounted prices following the recession. Capital from Germany, the
Middle East and South Korea has been particularly evident in primary markets, according to JLL.

Overall sales activity was helped by large sales in the CBDs of Chicago, New York and Washington DC,
with primary markets accounting for a 53% share of office sales in the first six months of tyhis year.

“With institutions, private equity, high-net-worth individuals and foreign investors all in aggressive pursuit
of commercial real estate, transaction activity in the United States should remain brisk and continue to
grow,” said Jay Koster, Americas president for capital markets at Jones Lang LaSalle. “In particular, we
expect office sales transactions to significantly boost volume in the second half of the year, with activity
propelled by improving employment growth within the technology, health care and energy sectors.”

JLL expects to see a continued increase in activity for top-quality assets in secondary markets as
investors, discouraged by the current low yields available on prime assets, begin to set their sights higher
up the risk curve.

“Activity in Atlanta, Dallas, Houston and Minneapolis is keeping that share strong, and based on the
heated investment competition in primary markets, there are very solid prospects for additional sales
growth in these areas,” said Marisha Clinton, director of capital markets research at JLL.

Andrea Cross, national office research manager at Colliers International in San Francisco, is seeing much
the same thing.

“We are seeing investor interest expand from core properties and markets due to a lack of available
product in those areas and improving economic conditions in a greater number of markets,” Cross said.

“There also is a lot of available capital, and office still offers attractive risk-adjusted returns compared to
many other investments. With the low interest rate environment coming to an end, we expect demand to
remain strong through the end of the year as buyers seek to lock in cheap debt.”

Source: CoStar Mark Heschmeyer September 18, 2013
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