2004 office sales top $70b, says CBRE report

Real Estate Weekly, March 16, 2005

National office property sales rose above $70 billion in 2004, compared to $46 billion in 2003.

By the end of the third quarter, the total sales volume for office properties had surpassed the total volume of sales recorded for 2003, an astounding performance fueled by the strong demand, especially on the part of institutional investors, for well-located fully-leased office buildings.

Capital inflows from such investors are expected to further increase in 2005, given the institutions' realization that real estate is an essential component of a well-balanced portfolio.

These, among other findings, were revealed in CB Richard Ellis' newly-launched report "Office Insights," a bi-annual publication compiled by CBRE Research which tracks the state of the national office market.

Moreover, the national leasing market showed steady improvement in 2004, bolstered by positive job growth and a recovering economy. Downtowns, in particular posted declining vacancy rates, namely Las Vegas, Salt Lake city and Jacksonville to name a few, although there are still some Downtowns that are struggling. In the meantime, the coastal cities of Manhattan, Miami, and San Francisco showed marked increases in leasing activity.

During the second half of 2004, the economy started producing jobs at a healthy pace, recovering from a lackluster first half. Revised payroll figures surged over 400,000 in the third quarter and these gains were solidified by 606,000 new jobs in the fourth quarter.

Business payrolls appear to be on the upswing in every sector of the economy, except manufacturing.

"As we recover from the last recession, business income, profits and even employment are now near or above pre-recession peaks," said Steven Dunn, CBRE Chief Economist.

"This should equate to a surge in corporate spending and a significant increase in demand for office space.

"The competitive buying environment drove down the average national cap rate to a record low of 7.8 percent in the fourth quarter. That did not, however, slow demand for office properties from banks, pension funds and financial institutions many of whom experienced heavy losses in the securities markets in recent years and who now understand that office buildings with slow but steady yields represent an attractive alternative investment."

Other findings in the report include:

Despite the tremendously active investment sales market, new construction starts during 2004 were very moderate and are forecast to decline in 2005;

* During the fourth quarter, there were nearly $500 million in office sales closings per business day;

* 2004 was a sluggish leasing year, yet net absorption during the second half totaled 17.8 million square feet, up 11.4 million in the third quarter. The last three quarters of the year showed the strongest 3-quarter net absorption performance since 2000;

* Asset values are likely to increase given rising construction costs and material shortages due to colossal projects taking place in China and the re-building of Iraq.