Why Aren’t Steady Office Sales and Prices Making Headlines?

Recently, we published state-of-the-market reports on some of the most buzzworthy asset classes for growth, including multifamily and vacant land. In researching other asset classes to explore next, we couldn’t help but notice the general lack of chatter surrounding the office market. What used to be the talk of the town in commercial real estate has faded to barely a whisper, especially in the nation’s leading pubs. Why has there been so little written about the office market? It might be because not much has changed…

According to our insights, office investment activity has remained fairly stable over the past five years, with prices slightly decreasing. Even in “high-growth” market activity in places like Kansas City has remained steadfast. It’s quite possible the consistency surrounding office isn’t making headlines because it’s, well, consistent.

Below is a snapshot of the market’s performance including an overview of transaction volumes, current prices and where the office market might be headed.

Slow and Steady…

Unlike other mercurial markets like industrial and multifamily, interest in office buildings and corporate parks has remained fairly stable since 2014. Over the past five years, there’s been little change in both sales volume and price.

In diving deeper into the data, the nation’s count of sales has increased ever so slightly year-over-year, but not enough to make or break the market’s performance or diverge from general economic trends. Contrarily, sales prices have slightly decreased year-over-year, hovering around the $2.4M mark since 2016.

Even in exploring sub-markets within the office sphere with declining prices, like business parks and financial buildings, transaction activity and sales prices have declined just slightly. Sure, it ebbed and flowed at some points, but certainly not drastically.

The question is, why?

While other asset classes are driving investor demand or falling off the radar, office is stable… Is it because commercial real estate professionals are shying away from the active investments office buildings have become? Other more passive investments, like vacant land and industrial which are garnering tons of attention, don’t necessarily require much managerial upkeep. Could this be why office has stalled?

Or, are America’s working norms changing the level of demand? As the gig economy picks up and more companies offer flexible/remote work schedules, is the modern office becoming outmoded? Nothing is set in stone, but changing investment preferences and economic shifts could be reasons behind the plateau in office activity.

Midwest Markets Might be on the Rise

While most of the nation is stable across the board, there are a few areas experiencing higher growth than the rest of the country.

The MSAs below have had the highest volume of Office sales. And while Denver has seen an uptick in average price since 2017, the majority of other high volume markets are either stable or starting to decline in terms of average price per sale. Los Angeles especially has seen a decrease in average sales value for office properties in the last two years.

Reonomy intelligence indicates that the top five MSAs for office activity are predominantly midwestern, with Kansas City, Knoxville, St. Louis and Indianapolis as four of the five fastest-growing office markets (the 5th being Sacramento.) Kansas City tops the list as the fastest-growing MSA, with average sales prices more than doubling since 2014. The Missouri metro has a solid economic foundation, especially in terms of employment job growth. According to the Bureau of Labor Statistics, the city added 19,500 jobs between August 2018 and August 2019—a 1.8% total increase. Specifically, education and health services made the largest jump, adding a total of 10,000 jobs in that time period and exceeding the national increase (6.5% v 2.5%) over the year.

The city’s job market could be driving demand for office space. Average prices have grown by 19.7% from 2018. But while prices have fluctuated, the cumulative growth in sales volumes over the past five years sits at just 38% over 4 years – even in the nation’s fastest-growing market, office growth isn’t exactly electric.

The Takeaways

Why is no one talking about office? Because there’s not much to report.

Investment activity and prices are stable and consistent (if not slightly declining), making it less than newsworthy for commercial real estate professionals. Certain areas like Kansas City are promising, with an uptick in office activity, but nothing completely industry-altering.

Opportunistic investors and developers who like a little more risk and high yields should consider other asset classes—potentially the ones that are making the news.

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