Robust Demand for Office Towers in Second-Tier US Cities

Posted on 12 October, 2012 by Jodee Redmond

There are many office towers up for sale in second-tier cities across the United States, and investors seeking higher levels of return on their investments are responding with great interest. New listings that have recently come onto the market include IDS Center, which has the distinction of being the tallest building in Minneapolis, 1201 Third Avenue, the second-highest building in Seattle, and Williams Tower, the third-tallest building in Houston.

 

Commercial investors who are prepared to look beyond gateway cities can find good quality properties for sale. Sales of properties in cities other than Boston, Chicago, Los Angeles, New York, San Francisco, and Washington made up over 30 per cent of office transactions to the third quarter of 2012. Properties in this category made up 23 per cent of sales in 2011, according to research firm Real Capital Analytics Inc.

Sellers are putting properties on the market to take advantage of the recovery. Since yields are quite thin in gateway cities, investors are considering other options and looking at smaller markets where they can get higher returns on their investments.

In the period from January to September, total office sales came in at about $48 billion. This figure represents an increase of about 7.7 per cent from last year. The volume of sales transactions for 2012 may total over $70 billion, which is the highest level since the market hit its peak in 2007. That year, $212 billion in property changed hands.

With an average price of $161 per square foot, office buildings in these smaller markets represent good deals for investors. Capitalization rates (a property’s net operating income divided by the selling price) in these markets was an average of 7.7 per cent. In major cities, the capitalization rate was 6.3 per cent and it dropped to 5 per cent in Manhattan (the largest office market in the country).

 




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