Office Investment Regaining Consistency
Real Capital Markets, Carlsbad, Calif., said the office investment market is back on track and buoyed by significant capital for deal-making following some political and economic uncertainty over the past year.
“Conventional wisdom and years of experience tell us that we may be long in the cycle,” said Real Capital Markets COO Tina Lichens. “At the same time, there is a broad sense of optimism, albeit somewhat cautious, that with the level of capital poised for investment, there are still allocations to be met and transactions to be completed.”
Investor comments suggest the U.S. office investment market is healthy following a late 2018 slowdown that lingered into early 2019, the company’s Office Investor Sentiment Report said. “Political and economic forces including the government shutdown, uncertainty about interest rates and the real threat of tariffs and trade war escalation raised questions, generated considerable uncertainty and slowed activity,” RCM said. “However, at the mid-point of 2019, property owners, investors and brokers expressed confidence in the health of the market given the strength of the economy, continued job growth and population expansion in many markets. This is reinforced by the estimated $200 billion in dry powder allocated to the commercial real estate market.”
RCM called investors “cautiously confident” and noted economic expansion, population growth and low unemployment all bode well for the sector. “However, there is caution given the length of the cycle and concern about how a downturn would impact pricing,” the report said.
Survey participants said value-add suburban properties offer the greatest opportunity in today’s office market, followed by well-located properties in emerging markets. Each of those market segments was noted by more than 35 percent of respondents.
On the other end of the spectrum, the property categories deemed less attractive at the moment include stabilized, well-located downtown buildings, trophy properties and stabilized, well-located suburban properties. “These findings reflect the perceived lateness in this investment cycle and investors continued focus on growth, value and yield,” the report said.
Despite its consistency relative to other property types, the office sector faces some challenges, RCM said, including the cost of tenant improvement allowances, the ongoing trend of tenants taking less space and the cost of converting underperforming assets.
“Markets with good fundamentals, including population and job growth as well as a highly trained labor force, are making the grade with investors,” RCM said. “Those include Charlotte, Chicago, Kansas City, Minneapolis, Phoenix and St. Louis, Mo. among others.”
