Pricing for office properties with minor leasing exposure has started moving up substantially, Jay Spivey, director of research and analytics for CoStar, noted during the webinar. The weighted average price per square foot of office properties 70%-80% and 80%-90% leased came in at more than $200/square foot – doubling from just the summer of last year.
Prices for office properties 90% occupied or higher started to level off to just less than $250/square foot.
Prices for office properties 70% occupied or less took a downturn in the quarter to a little more than $100/square foot.
Also notable this quarter, the discount for distress started gradually narrowing. The average prices coming in for nondistressed properties have remained relatively flat over the past year while distressed property prices have increased, Spivey noted. Thus the discount for distressed properties has moved from about 60% a year ago to 40% this past quarter.
Geographically, regional values are varying significantly. Based on peak-to-current price changes, office markets in the South and Northeast are off about 28% from their peaks compared to a national average of about 34.5%. Office markets in the Midwest and West were off about 38%.
Year to date, REIT and public investment funds and institutional funds have been net buyers each completing about $1.5 billion of net buying, with institutional funds being the most active buyers in total. Private investors, private equity funds and users were all net sellers in the quarter.
“With any new supply of office space expected to remain extremely low for the near future, the office market’s future performance sits squarely on the rate of office-based employment growth,” said Chris Macke, CoStar senior real estate strategist. “Office property sales volume performance and pricing will largely depend on the individual market — whether it is a major gateway market that attracts investor interest. Also the size of the property and how well leased the asset is will also have a major influence on its value in the current market.”
CoStar has provided other insights into the office investment markets to clients in the past two weeks, which are summarized below.
Give Me an ‘A’
In the first quarter of 2011 for the first time since the peak of the cycle, Class A properties in the six primary markets accounted for the largest percentage of square feet trading (27%), according to Stephanie Hession, senior real estate economist for CoStar Group. This top segment of the market has been steadily making up a greater share of square feet trading since early 2010.
Volume for Class A properties in primary markets was similar to 2006 levels in late 2010, but no other segment came close to those levels. Pricing for these crème-de-la-crème properties has bounced hard off the bottom. The weighted average price for Class A properties in primary markets got back to 2006 levels in the fourth quarter of 2010, Hession said.
Class A properties in secondary markets (such as Houston, Seattle and Denver) are also capturing a larger share of sales but to a lesser degree. Class A assets in secondary markets are also showing a stable, though less pronounced, rise in pricing, Hession said.
New York City: Distress at Non-Distress Prices
From a sales perspective, the New York office market woke up last year and investors have remained anxious to get into the market, and first quarter sales volume have come in strong. To date, the top deals in 2011 have been dominated by recapitalizations and partial interest transfers, most of which have been distress-related, said Aaron Jodka, manager, U.S. market research for CoStar.
In the first quarter, SL Green continued to increase its Manhattan holdings by recapitalizing 3 Columbus Circle. Having battled to stave off foreclosure after The Related Cos. purchased the $250 million mortgage on the property (Related planned to demolish the building and replace it with a condo tower), the Moinian Group paid off the loan with SL Green’s infusion. Moinian has been renovating the property, and now that ownership has been secured, leasing momentum could pick up quickly, as it did for 510 Madison after Boston Properties purchased the tower.
In another deal, Vornado Realty Trust bought a 95% interest in 1 Park Avenue, for $426/square foot, or $374 million. The owner was Murray Hill Properties, which was on the verge of losing the building. Murray Hill was also able to secure a $300 million recapitalization on 1180 Sixth Avenue, or $756/square foot, from an overseas source.
These deals illustrate the high prices that are being paid for distressed assets, including those at imminent risk of foreclosure. The 1 Park Ave. deal suggests a 28% decline in value from the top of the market, which compares favorably to properties sold last year and in 2009, when discounts to peak pricing and the broader market were substantially higher.
A Closer Look at Distress Sales
Distress in commercial real estate (CRE) has been accelerating over the past two years – and is influencing prices. For example, office market distress sales as a percentage of total sales within CoStar’s repeat-sales transactions database have increased steadily over the past year, reaching 23% in the fourth quarter of 2010.
Yet for investment-grade properties, the incidence of distress (relative to total sales), although rising, is much lower (7%), said Ozlem Yanmaz-Tuzel, a project manager for CoStar.
We expect that distress sales will increase further in 2011 across the board, Yanmaz-Tuzel said. However, this supply will be met with ample investor demand amid improving market fundamentals, leading to a more broadly based recovery in CRE prices. (credit,m.heschmeyer,costar)