Real Estate Alert
January 22, 2020
By Alison Waldman
Offce-property sales rose a hefty 13% last year, largely on the strength of booming West Coast markets, while Eastdil Secured retained its crown as the sector’s most-active broker.
A total of $109.2 billion of offices changed hands, up from $96.8 billion in 2018. It was the second-highest tally since the market recovery began a decade ago, just below 2015’s peak of $113 billion, according to Real Estate Alert’s Deal Database, which tracks sales of $25 million and up.
Eastdil closed $23.6 billion of large office trades in 2019, up 6% from the previous year. That trailed the 16% growth in total brokered volume, and as a result the firm’s market share slipped to 24.4% from 26.8% in 2018. CBRE landed again in second place with $18.5 billion of transactions, up 25% for a 19.1% share. Cushman & Wakefield had a similar gain and came in a close third, with $17.9 billion and an 18.5% share.
Newmark’s sales jumped 42% to $14 billion, moving it up one notch to put it in fourth place. JLL was fifth with $13.2 billion — but its midyear acquisition of sixth-place HFF positions it to move up in future rankings. On a pro-forma basis, its tally combined with HFF’s $6.3 billion of deals in the first half of last year would have put the firm in second place.
Annual sales of large office properties have now topped $90 billion for six years in a row, breaking $100 billion in three of those years. Except for dips in 2016 and 2017, the market has been in growth mode ever since it bottomed out at just $12.6 billion amid the economic crisis in 2009.
“A decade ago the capital markets were slowly, and not so surely, coming out of intensive care on the road to what has become the longest, steadiest and healthiest expansion in history, which today shows few signs of receding,” said Douglas Harmon, co-chair of capital markets at Cushman. “The motto heading into 2020 is ‘low, slow and steady growth.’ ”
Brokers see continued robust demand, particularly in markets with strong economic growth, that could push this year’s volume closer to its cyclical peak.
“We anticipate the constructive capital-markets environment of the second half of last year to likely continue,” at least in the first half, said Stephen Van Dusen, a managing director in Eastdil’s San Francisco office. “On a national basis for office product, the pipeline in general appears to be in equilibrium on a year-over-year basis, although overall volume and activity is very regionally specific.”
Indeed, last year’s sales growth varied widely market-by-market, with investors clearly favoring those with the most potential for gains. Seattle, for example, soared into second place among the most-active markets. Sales more than doubled to $10.2 billion, making it only the third market ever to cross the $10 billion mark, after New York and Los Angeles.
Third-place Boston saw sales rise 37% to $8.4 billion. San Jose/Silicon Valley followed at $8.2 billion, up 21%, and San Francisco’s volume grew two and a half times to $7 billion, good for fifth place. All are markets with strong leasing demand and higher-than-average rent growth, driven largely by the burgeoning technology and life-science sectors.
“From an investor standpoint, we are late in the cycle and property values are relatively full,” said Mark Wilsmann, head of real estate equity investments at MetLife Investment. “As a result, investors are really looking for opportunities where they see long-term growth and income performance over time.”
Last year was particularly busy on the West Coast, where six markets placed in the top 20, together accounting for 34% of total sales. In fact, just four of those markets — Seattle, San Jose/Silicon Valley, San Francisco and Oakland/East Bay — together saw sales growth of $12.7 billion, slightly exceeding the overall national increase.
While pros anticipate the pace of trading to remain brisk in those markets, they think the dollar volume is likely to drop this year.
“What we saw in 2019 was that large deals made up a bigger percentage of the overall market than what we normally see,” said Russell Ingrum, a CBRE vice chairman and executive partner in the Northern California institutional capital markets group. This year, he said, “there will be just as many trades but probably not at the same dollar level.”
A handful of smaller markets also saw significant gains in volume, as investors sought out opportunities in areas being transformed by population and corporate growth. Record highs were set in North Carolina ($3 billion) and Tennessee ($1 billion), fueled by the expanding markets of Charlotte, Raleigh and Nashville.
“These [growth] markets have a very high quality of life and low cost of living, and obviously capitalization rates are at least 200 bp wider than some gateway markets,” said Ariel Bentata, a founder and managing partner at Accesso Partners of Hallandale Beach, Fla., which targets high-yield office deals, largely in secondary markets. “What we have seen in the last few years is that institutional investors are starting to recognize this.”
Meanwhile, some major markets bucked the national upward trend. New York City, the perennial leader in office sales, posted an almost 5% decline to $17.3 billion, with fewer large listings and a gap in pricing expectations between buyers and sellers. In Washington, which is facing headwinds from new supply, volume dropped 18% to $3.7 billion. Chicago, typically a top-20 market, tumbled to 22nd with a 61% decline to $1.5 billion despite a heavy pipeline of offerings, as buyers cast a wary eye on a potential property tax increase.
But pros see an opportunity for a rebound in New York and Chicago, which each posted gains in leasing activity last year despite heavy construction pipelines. That could prompt investors to warm up to those markets — and they may find more-favorable capitalization rates than on prime properties in the hottest West Coast markets.
“So much of this is going to be driven by [leasing] fundamentals on the ground, and in general, most markets are in a pretty balanced position,” said Joshua Carson, a managing director at Blackstone focused on asset management of the firm’s U.S. office portfolio. He added that the buyer pool nationally remains broad, although with regional variations, and that foreign buyers may be more active this year. “I think we have the potential for a really strong 2020 from a sales perspective.”
Jaime Fink, office group co-leader at JLL, noted that rising prices in the hot multi-family and industrial sectors are causing some investors to shift their gaze back toward office deals.
“Capital looks at the opportunity in large core and core-plus office and says, ‘Yields are compressing in other highly sought-after property sectors, you still have a relatively attractive buy in office properties, so why not take advantage of the opportunity?’ ” Fink said.
One cloud on the horizon is the upcoming presidential election, which market pros said could stifle activity late in the year.
An election year, said Ingrum at CBRE, “causes [investors] to get a little bit anxious. In our current political environment, it will be a little more uncertain than normal.” He added: “It’s not a signal that the cycle is coming to an end, it’s just [that] the process of the peaceful transition of power in this country gets peoples’ attention and focus, and they change their bets as a result. But it is a temporary moment in time.”
The broker rankings are based on property transactions that closed during 2019 and involved full or partial stakes valued at $25 million or more. When multiple brokers shared a listing, the dollar credit was divided evenly, but each broker was credited with one transaction. Only brokers for sellers were given credit. Portfolio transactions were included if the overall price was at least $200 million or if at least one property in the portfolio had a value of at least $25 million.