PwC US: Office Sector Making a Comeback

According to PwC US's second quarter Real Estate Investor Survey, the office sector is well on the road to recovery and rising higher on the investment radar.

In the post-recession commercial real estate market, apartments have been at the top of investors’ list, but according to PwC US’s second quarter Real Estate Investor Survey, the office sector is well on the road to recovery and rising higher on the investment radar.

The apartment sector, which continues to be bolstered by growing demand for rentals among newly formed households and the 20-something set, holds the top spot but the results from PwC’s survey indicate that investment is, increasingly, all about the office market. During the second quarter, national cap rates for apartments dropped seven basis points to 5.76 percent, but in the central business district office market, cap rates declined 17 basis points to 6.86 percent.

However, the office markets to which investors are becoming more attracted are not the usual suspects. Not New York, not Washington, D.C. Competition to get into those hot-spots has become steep, as have the price tags. “It’s causing investors to step back step back and say, ‘We’ve got to look at a map of the United States and not run to every place that everybody else is running,'” Mitchell M.  Roschelle, partner with PwC, told Commercial Property Executive. “And some of the places that they’re going to are markets such as Phoenix, South Florida, San Diego. They’re saying, ‘If we sort of all go look at different places, maybe we all won’t be showing up at the same place, at the same time to bid on the same asset.'”

In Southeast Florida, for example, office cap rates declined 84 basis points to 8.41 percent. “The surprise is how far investors are willing to look beyond those traditional hot markets,” said Roschelle. “San Diego or Portland, Oregon–those aren’t cities you hear about.” Fundamentals are growing increasingly positive for many of these second-tier, overlooked cities such as Denver, for which PwC forecasts positive growth in 2013 through 2015. Such is also the case for Indianapolis, Ind., and Trenton, N.J.

PwC’s tracking of the percent of office inventory, measured in square footage, that has sold in the last 12 months serves as another indicator of the location of mounting investor interest. For the year ending at the close of the first quarter of 2012, 18 percent of the office stock in Denver sold, 16.7 percent came under new ownership in Northern New Jersey and 13.3 percent sold in Phoenix. Whereas, in Washington, D.C., and Los Angeles, a respective 6.5 percent and 8.1 percent of office inventory sold. “If 10 percent of the stock or 18 percent of the stock traded hands, that’s a lot of investor interest in a market,” Roschelle noted. “The point is that there are names that are on that list that we wouldn’t expect to be on that list.”