Property pricing for office subtypes still moving in different directions

Property price growth among office subtypes continued to diverge in March, with prices in suburban areas accelerating while those in central business districts fell, Real Capital Analytics (RCA) reported.

RCA’s Commercial Property Price Index (CPPI) for central business district (CBD) office properties was down 2.4% year over year last month, a decrease of 0.2 percentage points from February. The suburban CPPI, on the other hand, rose to a 3.6% annual rate of growth, up 0.6 percentage points from the month prior. Suburban office prices have now risen for six months straight, reflecting the recent strong office deal activity in suburban markets.

Conversely, according to RCA’s data, March marks the 15th consecutive month that annual price growth for CBD offices has decreased, as well as the fifth straight month that annual price growth has been negative.

Suburban offices’ healthy price performance did lift the overall office CPPI to a 2.9% annual gain in March, picking up 0.6 percentage points from February. Thanks to consistent suburban CPPI growth, prices in the office sector as a whole are starting to gain steam again, posting their best year-over-year increase since March of last year, one month into the COVID-19 pandemic.

The impacts of the virus and of remote work continue to dampen total office deal volume, with RCA reporting $20.5 in transactions for the first three months of 2021. That’s down 36% from the same quarter last year, the last quarter before COVID truly began wreaking havoc on the economy and the commercial property market.

Interestingly, much of that sales activity has come from a handful of large, big city transactions in, showing that, despite the weakness in CBD pricing, investor demand remains for quality assets in premier locations. Kilroy Realty, for example, sold The Exchange on 16th, a 750,000-square-foot space in San Francisco’s Mission Bay neighborhood, for $1 billion in March. More than 98% of that property’s net rentable area is leased out to Dropbox, which in 2017 signed a 15-year lease to occupy the building. At the time, it was the largest singular Class A commercial lease transaction in San Francisco’s history.

Other similar large office deals include the sale of Oakland’s Uptown Station, which netted a price in the range of $425 million, and that of the iconic Crescent mixed-use complex (which includes three office towers in addition to a luxury hotel) just north of downtown Dallas for $700 million. The former transaction comes almost a year after Blackstone Group balked on acquiring Uptown Station for $405 million, citing apprehensions over the lending market as the pandemic took root. Representing a price bump from the defunct Blackstone sale, the new Uptown Station deal set an Oakland record in per-square-foot pricing. Meanwhile, the latter, which was finalized in late March, set its own commercial property record for Dallas, according to the Dallas Morning News.


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