GlobeSt.com EXCLUSIVE: Office Sales Analysis Points to Q2 Surge

"The first quarter seemed to get a late start," says John Alvarado, a senior vice president of investment sales for locally based Trammell Crow Co. who tracks sales of office buildings with 100,000 sf or more. "Transactions that were slated for first quarter will happen in the second quarter and will make for a really big quarter." Sales that have trickled over include the lion's share of the Chicago-based Equity Office Properties Trust portfolio.

In the first quarter, seven class A office buildings changed hands for $127.8 million, Alvarado tells GlobeSt.com. In contrast, 13 sales in Q1 2004 pulled in $180 million. "We had roughly 50% of the transactions, but not 50% of the value so we're trading some pretty large transactions," he says. "If the Equity portfolio had traded in its entirety in the first quarter, we would have had a record quarter."

It's no secret on the streets of Dallas that Equity is close to sitting down at the closing table with CarrAmerica Realty Corp. of Washington, DC, and Bentley Forbes Group of Los Angeles. It's also becoming widely known Colony Capital LLC of Los Angeles has dropped its bid for part of the package. The pending sales are Equity's "swan song" for DFW, which to date has collected $65 million for a pair of office buildings in Las Colinas from Q1's top spender, CB Richard Ellis Investors LLC of Los Angeles.

Alvarado predicts this year will drive a substantial number of "core" office buildings to market due to high prices and a shift by institutions to be buyers rather than sellers as everyone starts to accept that lower cap rates are here to stay. He says forward-looking investors have been scoring their wins at lower cap rates because they're paying less for equity from sources like TICs, 1031 pools and syndications. For a couple years, the region's office market has been more of a value-add playing field for opportunistic buyers.

Alvarado's analysis shows the average price per sf has dipped about 5% from a year ago. Class A space traded for $92 per sf, on average, and class B reeled in $56 per sf. But occupancies of the sold product are rising, according to Alvarado's calculations that pegged the average at 77% for Q1 sales. The average occupancy last year was 56%.

"The underlying theme to me is the Dallas market is showing favor with local and external investors," Alvarado says. "Absorption is moving in the right direction plus some very attractive product has hit the market, more institutional-quality product."

REITs led the pack of sellers, getting $65 million for office buildings in Q1 versus $4.5 million a year ago. The investor category collected $46.5 million in comparison to last year's $83.7 million and institutions reeled in $16.3 million versus $9.6 million in Q1 2004. Buyers, on the other hand, were predominately pension funds, which spent $65 million in Q1; investment groups, $57.8 million; and corporate/users, $5 million. As for the REITs, they took a bye on the buy side of the table for the quarter.