Report highlights dynamic changes in capital markets for office properties

Real Estate Weekly, Feb 18, 1998

Investment in U.S. office properties has nearly doubled over the past year, with pricing increasing an average of 20 percent nationally, according to a report issued by Granite Partners, a real estate investment banking firm.

Granite estimates that total office investment was approximately $46 billion in 1997, based on a comprehensive tracking of office transactions greater than $10 million. This new report highlights the dynamic changes and emerging trends in the capital markets for office properties. Some of the findings of the Granite Report include:

* The volume of office investment continues to increase. Granite recorded increased office investment activity by all capital sectors in the fourth quarter. Large portfolio transactions account for approximately 40 percent of all office investment.

* REITs accounted for nearly half of all properties sold individually and approximately 84 percent of portfolio deals. Private investors were the next most active acquirers, followed by institutions and opportunity funds. The investment profile can vary greatly by market, however. In Washington, D.C., offshore capital dominated office investment, while in Manhattan, private investors and opportunity funds outstripped investment by REITs.

* REITs and other public companies dominated office investment in 1997, acquiring over $28 billion of properties. The most active buyers included Equity Office, Spieker, TrizecHahn, Mack-Cali, Crescent, Vornado, Highwoods, Cornerstone and Boston Properties, which each acquired more than $1 billion of office properties in 1997.

* Average pricing increased from $114 per square foot in the first quarter of 1997 to $135 in the fourth quarter. Acquisitions by offshore investors have the highest average price, approximately $137 per square foot, while opportunity funds and private investors have the lowest, approximately $96 and $104 per square foot, respectively.

* Office investment has shifted from suburban to downtown properties. Sales of downtown (CBD) buildings have dramatically increased from less than $2 billion in the first quarter of 1997 to over $5 billion in the fourth quarter, and now account for almost two-thirds of total volume.

* New York City was the most active office investment market in 1997, with approximately $6 billion of transactions. The most active suburban markets include Northern New Jersey, Los Angeles, Washington, D.C., Atlanta, San Francisco, Chicago and Dallas.

"The capital markets for office properties continues to favor sellers," said Robert M. White, Jr., senior vice president of Granite Partners. "Increasing investment by institutions, private investors, opportunity funds and offshore sources will provide even greater competition to the REITs in 1998. Additionally, improving national occupancy rates and rents will attract more capital and justify even higher pricing levels for office properties."

Granite Partners has offices in New York City and Houston. In 1997, Granite's advisory activity approached $1 billion, encompassing all property types nationally. Granite represents clients throughout the United States and abroad, including Metropolitan Life, Prudential Insurance, Aetna, LaSalle Advisors, Chase Manhattan Bank, Bank of Montreal, PNC Bank, Amtrak and AMC Entertainment, Inc.