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High Turnover in Office Ownership Confirms Growing Strength of Secondary Markets

Office Investors Increasingly Active Across More Secondary Markets Even as Core Gateways Maintain Their Luster
February 26, 2014
Last year saw the return of a thriving office investment market, so much so in fact, that several local markets saw significant chunks of their overall stock of buildings change hands in 2013.

Analyzing such office inventory turnover can provide a good barometer of where office investment dollars are flowing, and also reveal markets that offer opportunities for further investment.

"While overall CRE investment volume rose 14% in 2013 from 2012 levels, office sector activity increased 17% to over $104 billion, the highest annual volume recorded for the four major property types,” said Nancy Muscatello, senior real estate economist with CoStar Group.


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"Although last year’s haul was still shy of the peak office investment levels we saw in 2007, it does demonstrate the return of strong investor interest in office property, although that wasn’t necessarily the case everywhere.”

Looking at office inventory turnover trends across the top 54 U.S. office markets, five Southern and Western markets saw more 10% or more of their total office market inventory change hands last year: Austin, Dallas/Fort Worth, Atlanta, Houston and Denver. Austin was especially popular with office investors as 13% of its office space was acquired by new owners in 2013.

Six office markets saw just 3% or less of their stock change hands: Long Island, Sacramento, Baltimore, Pittsburgh, Honolulu and Richmond, which posted the lowest turnover of 2%.

The surge in transaction volume in many of these markets was predictable, Muscatello said.

"Houston is a shiny object that investors cannot seem to get enough of, offering a bulletproof demand story and fairly decent yields," as a result trading volume has soared in some key submarkets, she said.

“Austin has also been on the radar of investors for quite some time. The metro had a huge inventory turnover in 2013 (13.1% of inventory,) although a sizable portion of that (40%) was due to portfolio sales," Muscatello noted. The biggest portfolio to trade hands last year in Austin was the sale of the Thomas Properties Group portfolio of five trophy CBD towers as part of the firm’s acquisition by Parkway Properties.

"With a large chunk of the CBD inventory having already traded in this market, I would expect sales to remain strong, but turnover rates to moderate in the near term," Muscatello added.

Chris Hightower, an investment broker with Marcus & Millichap in Austin, said the ownership changes demonstrate the evolution of the Austin market. Historically, big institutional buyers have eschewed the ‘Live Music Capital of the World’ due to its relatively small size compared to major markets.

“However Austin has become real estate darling due to the hard charging Austin economy,” Hightower said.

Meanwhile, some of the nation’s core coastal markets saw relatively lower inventory turnover, including Washington, DC, San Francisco and New York, where just 5% of inventory traded hands. As a way of comparison, the average across the top 54 U.S. office markets was 6.33% turnover.

"Of course, that’s due in part to the size of those markets,” Muscatello noted. “Not only were they at the forefront of investment activity early in the recovery, but markets like New York and Washington DC have office inventories that are much larger than the average market. Investment volume in New York for example, still accounted for 23% of all office sales in 2013, even though New York’s share of the office inventory is only 10%. San Francisco also pulled in an outsized share of sales volume in 2013.”

Andrea Cross, national office research manager for Colliers International, also noted the turnover trend in the gateway markets.

"New York, San Francisco and Boston experienced the strongest demand from investors coming out of the recession, so many office assets in those markets have already traded. Lower inventory turnover in 2013 is attributable to a shortage of available assets and strong price increases in recent years rather than a lack of interest in those markets,” Cross said.

It's not so much that investor interest has waned in those markets, but rather it has expanded to include others.

“Office turnover in markets outside of the core gateway markets has picked up with broader economic growth and higher investor confidence in the office market’s recovery,” Cross said. “We are seeing higher turnover in many markets that were out of favor earlier in the recovery.”

Markets such as Nashville, Jacksonville, New Orleans and Las Vegas all saw 8% turnover in office inventory last year, according to CoStar data.

“Office sales volume is certainly on the rise in secondary markets as the recovery spreads to more markets and investors move out on the risk spectrum in search of higher yields,” Muscatello said.


Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.


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