Class A Offerings Catch Market’s Eye

Several owners that have well-leased Class A office buildings with strong credit in this market are considering the right time to begin selling their assets. The investment community has been kind to office buildings that have term, credit, and a compelling story behind them by pricing these assets with aggressive cap rates and per-square-foot pricing above replacement cost.

The suburban New York area market is seeing an increase in the number of office offerings compared to the last 24 months. However, the demand for these office assets is selective, with the fully leased Class A assets gathering the most attention.

Several owners that have well-leased Class A office buildings with strong credit in this market are considering the right time to begin selling their assets. The investment community has been kind to office buildings that have term, credit, and a compelling story behind them by pricing these assets with aggressive cap rates and per-square-foot pricing above replacement cost.

The lack of A product currently on the market relative to the capital chasing it, is resulting in a scarcity premium for the Class A properties which can be seen in several deals that have recently taken bids. These are mainly in premier submarkets that are supply constrained. Investors are focused on going in cap rates and internal rates of return; however, positive adjustments are made to the cap rates for tenant credit, remaining lease term, net lease structure, timing and amount of rent steps, debt assumption, lease term, and submarket.

This is resulting in stiff buyer competition for deals that meet core fund requirements by the institutions. Investors are focusing less on per-square-foot pricing and more on IRR’s in order to push value to remain competitive in the bid process. Debt is also readily available for these assets. With lenders attempting to secure 105 debt yields and interest rates at 4.5 percent for 5 year money and slightly over 5 percent for 10 year money.

The rationale for the increased activity is based on pent-up demand; the need for the equity to be placed, along with a lack of transaction activity over the past 24 months, has led buyers to become aggressive in pursuing Class A product. The activity is also fueled by the fact that investment periods are closing in the next 24 months for certain funds raised in the 2005-2007 time frame. Additionally, some investors are rebalancing their portfolio, while others are motivated to transact now while interest rates are still compelling.