Office Investment Back on Track After Challenging Early 2019

Real Capital Markets, Carlsbad, Calif., said office investment is “back on track,” buoyed by significant sources of 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.”

Investors RCM interviewed for its Mid-Year Office Investor Sentiment Report said the U.S. office investment market bounced back following a late 2018 slowdown that lingered into early 2019. “But at mid-2019, property owners, investors and brokers all expressed confidence in the health of the market given the strength of the economy, continued job growth and population expansion in many markets,” the report said. “This is reinforced by the estimated $200 billion in dry powder allocated to the commercial real estate market.”

RSM called investors cautiously confident at the moment. “Economic expansion, population growth and low unemployment all bode well for the sector,” the report said. “However, there is caution given the length of the cycle and concern about how a downturn would impact pricing.”

Transwestern, Houston, confirmed the U.S. office market remains strong with overall vacancy holding steady at 9.8 percent. National average asking rents inched higher during the first quarter to $26.63 per square foot, leading to a 4.1 percent annual growth rate.

Transwestern Research Director Ryan Tharp said the U.S. economy grew 3.2 percent between January and March, the highest first-quarter growth in four years. “But that said, we are closely watching how factors such as U.S. trade conditions might impact the domestic economy in the remainder of 2019,” he noted.

Of the 49 U.S. markets Transwestern tracks, 45 reported positive rent growth and 24 of those recorded rent growth rates exceeding three percent. Rent growth leaders included Minneapolis, San Francisco, San Jose, Nashville, Tenn. and Raleigh/Durham, N.C.

“Solid fundamentals and adequate debt and equity capital bode well for continued, healthy performance in the office sector and cap rates remain at historic lows,” Tharp said, predicting office asking rents will settle at an annual growth rate growth between 3.0 percent and 3.5 percent by the end of the year.

Real Capital Markets Executive Managing Director Steve Shanahan said the cycle has reached a very interesting time. “This is an investment cycle that despite its challenges has been extended by robust levels of capital available for investment, coupled with putting many lessons that have been learned from past cycles into practice,” he said.