By: Ozlem Yanmaz-Tuzel
As the commercial real estate market continues its recovery, the momentum of pricing has been shifting to secondary markets. Using CoStar’s extensive transaction database, we will have a closer look at recent office pricing trends in CBD and suburban areas.
Exhibit 1 compares the CoStar Commercial Repeat Sales Index (CCRSI) for CBD office markets with that of suburban markets. After bottoming out in the first quarter of 2011 with a peak-to-trough decline of 35%, the CBD office market price index has recovered by more than 16%.
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On the other hand, suburban office prices fell hard, dropping 40% from their peak and the suburban office index bottomed out much later, in the second quarter of 2012. Since then, however, the recovery has been solid and the suburban office index has rebounded by 15.8% through the third quarter, while CBD pricing, which recovered earlier, has moved up by just half that amount.
Supply constraints, generally higher occupancies and improved liquidity conditions offered by CBD properties drew the attention of core investors early in the cycle, but increasingly high prices and low cap rates have made these investments more competitive and susceptible to risk from rising interest rates.
As a result, investment has shifted to the broader market dominated by properties in suburban areas. Over the past two years, the share of total office sales volume in suburban markets has steadily increased (see Exhibit 2). As the search for investment yield continues, expect suburban office properties to continue to garner a significant share of sales volume.
Ozlem Yanmaz-Tuzel is a project manager for CoStar Group's quantitative analysis team.
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