Office investors this year have been buying properties that have stronger occupancy rates over the preceding 12 months, a notable strategic shift from the previous four years.
This is the first year since at least 2018 that acquired office buildings showed positive net absorption, which occurs when more space is occupied than becomes available. From 2018 through last year, the buildings purchased showed negative net absorption, putting more space on the market than was taken out of circulation through leasing.
The difference is showing up in vacancy rates and average property sale prices. Office buildings bought in 2018 had an average vacancy rate of 19.4% at the time of purchase. Office properties sold this year have averaged 16.6% vacancy at the time of purchase.
“The data clearly seems to show a steady trend toward safer assets, which makes sense,” said Elizabeth Ptacek, senior director of market analytics for CoStar. If investors are looking to buy office property “today, in a time of heightened uncertainty, then you’re going to buy higher-quality, well-leased assets.”
The average price paid for properties for which occupancy was at least 90% has climbed to $424 per square foot this year from $338 in 2018.
However, for properties that were less than 75% occupied, the average price was just a few dollars higher this year than in 2018, at $211 per square foot versus $200. While that’s only a 6% increase, inflation has driven prices up 15.85% over the same time, according to data from the Bureau of Labor Statistics.
“Investors are paying up for safety and requiring more of a discount for lease-up risk,” Ptacek said. “This very clearly reflects the office market’s very uncertain outlook.”