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Last Thursday, the Howard Hughes Corp. sold an equity stake in a 1.5-million-sq.-ft. office tower at 11 Wacker Drive in Chicago. At $210 million, the price of the transaction would put the valuation of the building at more than $1 billion, the highest valuation for an office building in Chicago since the sale of the Willis Tower to Blackstone in 2015. The deal marks the continuation of a trend started back toward the end of 2021, when big name investors began picking up trophy office properties at very healthy valuations.

Two years after the pandemic shut down offices around the world, many workers still have not returned full-time. “Everyone has an opinion on what ‘return to the office’ will look like, but no one really knows,” says Texas-based Russell Ingrum, vice chairman of capital markets with commercial real estate services firm CBRE. “Yet most investors remain bullish on this asset class and have determined how they want to make the office bet.”

In February, the most recent month for which data is available, office investment sales in the U.S. totaled $6.6 billion, a 99 percent increase over the same period in 2021, according to real estate data firm Real Capital Analytics (RCA). The average closing cap rate during the month stood at 6.3 percent, above those for multifamily and industrial assets, but significantly below the average for hotel trades.

In Ingrum’s view, almost all U.S. markets are likely to see higher trading volumes for office properties in 2022 compared to 2021. But he notes that the primary players in the market have switched from mostly institutional buyers to private capital and value-add funds.

Office investment today is “biased very heavily to private buyer groups, as institutions have over-weighted their major sector acquisition priorities to industrial and multifamily,” says Al Pontius, senior vice president and national director for office & industrial division at commercial brokerage Marcus & Millichap. “For the institutions, they will look very selectively at office buildings that are modern, best-in-class assets they expect to compete favorably for top companies in primary markets.”

Office REITs and offshore buyers, which have made a couple of acquisitions across the country in recent months, are also active, according to Ingrum. He adds, however, that they are picky about the types of assets they want to pursue. According to Lauro Ferroni, senior director of research, capital markets, with commercial real estate services firm JLL, says that capital from Canadian, German, Singaporean and South Korean investors continues to target U.S. office assets, particularly well-leased trophy product in gateway markets or top-momentum secondary markets.

What types of deals are getting done

While CBRE’s investment sales data for the first quarter is not yet available, Ingrum says he has noticed an acceleration in deal volume. “The most active deal type has migrated from single-tenant to value-add deals,” he adds. “While value-add funds are looking to place capital, we are also seeing a large amount of private capital and high-net-worth (HNW) investors helping to makeup the market for this asset.”

Just looking at closed office investment sales in Texas, Ingrum says that there have been more sales so far in 2022 than during the same period in 2021. JLL’s Ferroni agrees, noting a significant uptick in investment activity involving high-quality office buildings, especially among new developments that have completed their lease-up periods, with owners now looking to sell.

In addition, investor interest in single-tenant, net-leased office assets continues to be strong, with these transactions accounting for a higher proportion of overall activity than before the pandemic, Ferroni notes. Sale executions for older, commodity buildings that require re-positioning are much tougher in a world that values quality over price, according to Ingrum (although sometimes strong locations can still elicit investor interest even for older buildings).

Two years of sitting on the sidelines waiting to monetize an asset have created more office sellers in 2022, he notes, and generally the greatest sales volume occurs in markets where there are the most willing sellers. He notes that Houston, for example, is seeing a significant uptick in investor demand because a high number of owners are ready to monetize their office investments and move on.

“There were a number of owners that were getting ready to sell in late 2019 and early 2020, but their plans were interrupted by Covid-19 lockdowns. No doubt some lost tenancy that had to be backfilled and that takes some time,” he says. Now, with tenants signing leases again, investors can underwrite lease-up, bringing liquidity back for office buildings.

As property fundamentals improve, open-end diversified core equity (OCDC) funds, which have been active on the sell side, are expected to start making selective acquisitions in the months ahead, according to Ferroni. In addition, yield compressions on industrial and multifamily acquisitions is increasingly positioning office assets as a higher-yield alternative, she notes.

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