US Office Investment Continues to Decline

In an article by Real Capital Analytics president Robert White, and in its latest Capital Trends Monthly report, RCA points out that sales of office buildings declined by 80% for the month when compared with April 2007. White's article, featured on the Mortgage Bankers Association's website, notes that sales of significant office buildings totaled just $4.9 billion in April and $3.8 billion more listings than closings came to market in April. "So far this year a total of $37 billion of office properties have been put up for sale, twice the volume of transactions that have closed," White says in his market commentary.

White observes that "optimists have to look closely to find any positive signals in the marketplace." Although some larger properties have started to trade, sales of suburban properties fell to their lowest levels in April. The RCA president points out another big difference from last year's market: portfolio sales accounted for well over half of 2007's dollar volume, but such sales "have become rare in 2008." Not a single office portfolio sale was completed last month, he says.

According to the Capital Trends Monthly analysis of the latest monthly and year-to-date office market sales, the most active US office buyers this year have been Hines with five deals, Legacy Partners with four and the Grubb & Ellis funds that formerly operated under the Triple Net banner, with 13 deals. By contrast, more foreign buyers are entering the market, the RCA report says.

"Foreign buyers of US office properties have doubled their share of the acquisitions market over the past year," RCA's researchers conclude in their report. Offshore investors account for 12% of all recent office acquisitions, with Middle Eastern investors, particularly prominent new groups from Dubai, Dublin and repeat buyers from Spain, Germany, Israel and London among the new crop.

Despite this influx of capital from other countries, many foreign investors "remain circumspect of the US market," researchers say. The report points out that foreign investors nonetheless became net buyers of office properties in the first quarter of this year after being net sellers since mid-2006.

Other changes noted in the RCA report include the slowing in the amount of money that pension funds and other institutional investors are spending on office buildings. Also telling is the shift that has occurred among equity funds, which were big investors last year, but are likely to be sellers this year.

Although the institutional investors have slowed their rate of investing, they actually have increased their share of all office acquisitions slightly to 23% because so many other buyers are out of the market. RCA expects institutional buyers "will be key players in the market recovery" when it comes. The observation for equity funds is "with the high leverage that enabled these deals no longer available, the equity funds have already become net sellers and will likely remain so through 2008."

Despite dramatic changes in the capital and debt markets, the RCA report concludes "not all buyers are constrained by the debt markets or waiting on the sidelines for prices to fall." As RCA president White points out in his observations, one of the factors slowing sales is the gap in pricing between buyers and sellers.

That gap is wide, perhaps 15% or more, and declining sales volume indicates that little progress is being made to close the gap. "Sellers are largely sticking firm to their prices even though there are few buyers. In the meantime, capital continues to accumulate on the sidelines waiting for conditions to change," White concludes.