Now that summer is over I am aiming to post on a little more of a regular schedule (or so I keep saying….). Today I want to do a quick post on the office investment sales market.
In the last few months there have been a number of good sized private market office deals that have closed or gone under contract. This is great to see as we had a pretty long stretch there with minimal activity while interest rates were rising rapidly and there was a lot of uncertainty after the mini banking crisis. Generally in my view the comps have all been pretty positive - but its important to remember that my view in the base case still reflects a pretty hefty decline in pricing. However relative to where the public markets are trading the pricing has been quite good. Also note this list is not meant to be exhaustive - these are just some of the larger more notable sales that caught my interest.
For those who don’t want to read the whole article, here is a handy summary table.
Lets dive into the comps, in no particular order.
3 Ravinia
First up is 3 Ravinia, in the suburbs of Atlanta, GA. This is a ~814k square foot building located at 3 Ravinia Drive, that Blackstone just sold recently for $175mm or $215 psf to a group out of Orlando called Estein USA. The building was built in 1991 and is decent quality suburban product. It is in the Perimeter Center submarket, which is a fairly good suburban Atlanta location.
The building was picked up by Blackstone as part of its acquisition of Preferred Apartment Communities last year - as this was a company level purchase it is hard to say what kind of value Blackstone ascribed to this deal. Preferred is, as you may have guessed, primarily a multifamily REIT (with also a smaller grocery anchored retail component), so this asset was acquired incidentally & likely always slated for a sale by BS. Preferred itself bought the building for $210mm in 2016, so the current sale is about a 17% discount to that pricing. Specifics about cap rates and occupancy were not disclosed, but it looks like per Costar its just under 90% leased and asking $35 psf full service. IHG is a major tenant at around a quarter of the building.
Depending on where operating expenses shake out, this probably translates into a cap rate in the mid to low 8s.1 This cap rate and price psf for this quality building are to me actually really solid values - really positive sale here. In REIT land this asset is similar to Piedmont’s portfolio, which is trading at a significantly cheaper implied price.
1140 W Warner
Continuing through the suburbs, next up we have 3 single story buildings at 1120, 1130 & 1140 W Warner Road in Tempe AZ. These buildings totaling ~200k sf sold for $34.5mm back in July, which is about $170 psf. All 3 are leased with a few years of term left. This area is not a primary office corridor, & the asset itself looks to be a high parking ratio high density type asset. I can’t find great rental data so am not confident in projecting a cap rate here but this price per foot feels very strong for the asset type/location combination- very positive comp. One asterisk is the buyer has these marked as ‘flex industrial’ on their website, but pretty clearly these are office buildings given the amount of parking and the fact there are no dock doors on any of the assets.
1140 W Warner - the other two are quite similar
RBC Gateway
Next up is the RBC gateway at 250 Nicollet mall in downtown Minneapolis. Minneapolis has had a lot of negative CRE headlines (including one awful downtown sale), so this one was a nice positive to see. This is a brand new fully leased tower, and it just sold for $225mm. The building is ~525k sf, so that is about $430 psf. RBC anchors just over 60% of the space, presumably on a decent lease term.
This is a pretty big deal - it is one of the largest office sales of the year, and I’d guess is the biggest non-gateway market sale so far. The buyer was Spear Street Capital, an office focused group out of San Francisco. Again I don’t have detailed income information but based on their asking rents I’d guess the sale cap rate here could be as high as the low 7% range. If you apply a healthy vacancy allowance (as the deal appears to be almost fully leased), the cap rate could get even lower, closer to 6%.
Now the seller was apparently hoping to get closer to $300mm, so they may be slightly disappointed in the sale, but in my view this is a pretty damn good outcome. As a caveat the average lease term is probably close to 10 years, so the buyer has a long time before they have to deal with any sort of re-leasing.
This is all around just a really positive sale for high quality office assets - good cap rate and also pretty good price per foot2. Doubly so given it is located in a secondary market that has seen a lot of recent negative headlines.
Boston Bunch
Next up we have a trio of Boston sales courtesy of Real Estate Alert.
First up is 70 Federal Street. This 64k ft building in downtown Boston sold for $41mm or $640 psf. This is a nice asset with good window lines, is located right on a square, and has a relatively higher retail component given its a smaller 7 story building. The building was fully leased and last sold in 2016 for $38mm. Very strong comp overall.
Next up is 110 Milk Street aka 1 Liberty Square. This 157k sf building sold for $45mm or $286 psf. This is located near 70 Federal and shows just how wide a variance you can have in pricing within the same submarket. This is a older asset but with decent natural light given it occupies its own block. Vacancy here is reportedly more like 15-25%. This asset should be fairly indicative of stabilized lower quality building pricing for Boston.
The last is 855 Boylston Street over in the back bay. This 143k sf building sold for $100mm, or ~$700 psf. This is the highest quality building of the 3 and is in the best location. The property was apparently fully leased with a 5 year weighted average lease term. The sale included a below market assumable loan which probably boosted the sale price 5-8%.
855 Boylston
I’m less familiar with the Boston market so won’t try to estimate cap rates for these assets, but generally I found the price per foot for these sales fairly encouraging.
Cali Comps
To wrap it up we’ll head out California way to cover a few sales in LA and the bay area.
In LA, HPP sold two assets for $72mm located at 604 Arizona and 3401 Exposition. These are smaller assets, being 107k square feet combined. Both buildings are in Santa Monica, one of LA’s better submarkets if not the best.
Arizona
Exposition
Again no details were provided on occupancy or cap rate, but the per foot values are very nice here compared to where HPP is trading. HPP is one of the REITs I track and my NAV estimate for these two assets was $71mm, so right on the nose of the sale. Both assets appear to be fully leased to single tenants, and look to have traded around a low 8s cap rate by my estimates. Not a great cap rate, but still good relative to where HPP’s stock is trading & a good psf value.
Last but not least, we have a (pending) sale in the most beleaguered office market of all, San Francisco. 123 Townsend Street, a 138k square foot building next to the Giants stadium is going under contract for $72mm or ~$520 psf. Paypal is the main / maybe only tenant, leasing almost 3/4 of the space for another 6 years, but they are not occupying the space & have it up for sublease.
123 Townsend
This one is interesting - on the one hand this thing sold for $140mm in July of 2020, so this is a really awful decline since then. Alexandria had it under contract in Dec of 2019 for $160mm for an intended life sci conversion, but they walked from a big deposit (wisely) when covid occurred.
On the other hand - $520 per square foot really isn’t an awful price per pound for an essentially vacant building in SF in my view. Yes its way below the $1k + psf values people were assigning buildings in downtown, but those prices were very aggressive (of course easy to say with the benefit of hindsight) given the overall market was in the midst of a huge tech boom.
The building itself looks to be a converted warehouse. It has a very limited window line but probably has nice interior wood features & good ceiling heights.
Overall Townsend is a mixed bag - really rough decline from pre-covid pricing, however it is not quite as apocalyptic as some of the worst predictions would imply & still pretty high on an absolute basis.
Fin
In my view it is very encouraging to see buyers stepping off the sidelines and acquiring some very large office deals across the country. These sales help provide some much needed clarity on private market pricing levels, and will hopefully give other buyers and lenders confidence that the market is not in an absolute free fall.
I don’t know if this is the bottom or if prices will continue to grind lower3, but generally speaking these comps support private market valuations that are significantly higher than where the public office markets are trading. This gap create an opportunity for office REIT management teams to sell assets in order to capitalize on this spread.
The capital markets are an important part of the ecosystem, and its good to see some liquidity begin to flow again into the most troubled of asset classes. Ultimately the leasing market will need to show some strength before the office market fully recovers, but these sales are still a positive sign.
I didn’t spend much comping out rents and expenses for these cap rates so take them with a grain of salt.
I’d guess $430 psf is close to what it cost to build the asset, so the developer probably just sold at par and I’m guessing was happy to not lose any money here. Construction did start on this before covid so construction costs would be a good bit lower than you’d see today - so the developer may have made a small profit here, perhaps in the 10-15% range.
I’d guess we are going to see very divergent performances between different metro areas with some struggling for years to come and some beginning to stage recoveries.