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PHOENIX-Office investment and sales last year set new record for the region. But market experts believe the $205 per sf average in 2007 is likely to take a hit in ’08.

According to Transwestern’s 2007 year-end report, the office investment market chalked up $3.1 billion in total sales volume or $1.1 billion more than 2006′s total sales. In fourth quarter 2007, investors spent $594 million, which averaged out to $195 per sf.

Researchers caution price appreciation should level off as new supply comes on line in the next 24 months. For the past couple years, Melinda Korth, an executive vice president in Phoenix for CB Richard Ellis, says “buyers were getting great loans and securing deals, meaning sellers realized they could push prices.” As a result, she there were sharp spikes in asset prices. “If 2008 slows down from those levels, it won’t be a catastrophe, but the way to bring things back into balance,” Korth says.

Eric Wichterman, senior vice president with Grubb & Ellis/BRE Commercial LLC’s Phoenix office, points out office most likely will weather an economic downturn better than other product types because deals weren’t based on pure speculation. “People were optimistic in their assumptions when the cap rates dropped,” he explains, “but it wasn’t anything like the catastrophic irrationality we had in the housing markets.”

Wichterman also believes that the office market will be protected due to the investors it attracted. Although many of last year’s trophy asset trades were done by institutional investors and pension funds, the majority of investors were individuals, private fund managers or syndicates.

“We’re not like New York City, where practically all office buildings are high-rises topping $100 million and more,” Wichterman explains. “Institutional investors are looking for a minimum expenditure of $20 million.”

Wichterman points out that much of Phoenix’s office supply falls within the $2-million to $19-million range, which is more attractive to the private sector. And, he says the private sector wasn’t quite so leveraged and was better able to perform when the credit crisis hit.

Regardless of the fallout, neither Wichterman nor Korth see a huge fall off in office investments. Korth believes buyers and sellers are simply being more cautious when it comes to evaluating risk for returns. In other words, buyers are more interested in a sure thing when it comes to investments rather than going for the value-add assets that were so popular even a year ago. “The better-located, better-occupied and more diversified rent rolls are getting better dividends and are more popular among buyers,” Korth concludes.

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