Large office-property sales dipped 5% last year, but a surprisingly strong fourth quarter left market pros optimistic about activity this year.
A total of $103.7 billion of office properties traded in 2016, down from the post-crash high of $108.8 billion recorded the previous year, according to the Real Estate Alert Deal Database, which tracks sales of at least $25 million. The 2016 decline marked the end of a six-year run of increases.
Perennial winner Eastdil Secured retained the brokerage crown, increasing its sales by 8%, to $36.6 billion. It handled 40.1% of brokered trades, almost double the market share of runner-up CBRE.
The year was marked by uncertainty and the unexpected, including worries about whether the market runup had peaked, fluctuations in the financial markets and the election of President Donald Trump.
“The two words to describe 2016 in the end: unpredictable and resilient,” said Roy March, Eastdil’s chief executive officer. The second half turned out to be the busiest since 2006, but it wasn’t enough to make up for a sharp slump in the previous six months. At the midyear mark, office sales were off 17% from the same period of 2015.
“There was apprehension in the first half of the year. [Investors] were in a risk-off mode,” said Mark Wilsmann, head of equity investments at MetLife. At that point, market pros predicted the trend would continue through the second half as well.
But an unexpected drop in interest rates following the U.K.’s June vote to exit the European Union spurred buyers to close on deals faster, said Mike Van Konynenburg, president of Eastdil. “That motivated [investors] to transact because of the attractive cash-on-cash yields that could be locked in,” he said.
The upswing in activity continued after the unexpected election of Trump triggered a stock market rally that further lifted confidence among investors.
“If the stock market had gone sideways, I don’t think you would have seen that flurry of activity at the end of the year,” said Sonny Kalsi, founder and partner of GreenOak Real Estate of New York. “That’s a boost in confidence — in anticipation of what might happen under the new administration.”
Interest rates also rose after the election, but buyers and sellers still moved forward to close deals, albeit with some adjustments to pricing. Some $32 billion of trades closed in the final three months, making it the second-busiest fourth quarter since Real Estate Alert started measuring sales in 2001.
The post-election confidence is expected to carry into 2017. “The change in the political landscape creates a lot of uncertainty, but a greater possibility that the cycle would get extended with favorable fiscal policy,” said Wilsmann of MetLife.
Most market pros expect the volume of sales in the coming year to be roughly on par with 2016. Brokers and buyers alike say the pipeline of listings looks similar to a year ago. In fact, it may include some of the same properties. “I think we will see some offerings come in 2017 that were failed listings in 2016,” said Damian Manolis, head of U.S. transactions at PGIM Real Estate. He added that buyers and sellers appear to have come to a consensus on valuations, following a thinning in the bidding pools last year that created a gap in expectations.
Foreign buyers remain eager to invest in U.S. office properties, said Christopher Ludeman, global president of capital markets at CBRE. The firm “is actually seeing more enthusiasm for a U.S. growth story than before the election,” he said. “The U.S. will be the beneficiary of more capital inflows than before the election.”
That could boost sales in the core markets, many of which saw a drop in large sales last year. New York saw a 12% decline, to $23.2 billion. Boston was down 27% to $5.5 billion. Activity in San Jose/Silicon Valley was off 46%, at $5.2 billion.
A big gainer was Los Angeles, which had lagged in the earlier years of the recovery. Its volume doubled to $10.1 billion, making it the second-busiest market. And San Francisco, which saw a dip in 2015, bounced back with a 32% increase in trades, to $4.9 billion, putting it back in the top five.
Other markets where sales went up in a down year were South Florida ($3.4 billion, up 87%), Greater Philadelphia ($2.5 billion, up 59%) and the Oakland/East Bay area ($2.2 billion, up 78%).
In the brokerage standings, CBRE remained in second place with $18.9 billion of sales, down 12% from the previous year. That translated into a 20.8% market share, down from 23.2%. HFF came in third again, with a 9% increase in volume.
Cushman & Wakefield came in fourth with $8.3 billion of sales. DTZ acquired Cushman in September 2015 and assumed its name. Compared with the two firms’ combined 2015 number of $11.8 billion, Cushman’s 2016 total was down 29%. JLL came in fifth with $7.6 billion, roughly flat with the year before.
Meanwhile, Newmark Grubb, which recruited star brokerage teams on the East and West Coasts, moved up a notch to sixth place with $5.2 billion of sales — more than triple the previous year’s total (see article on Page 1).
The sales figures are based on office, office/flex, office/lab and office/R&D deals of at least $25 million that closed in 2016. Mixed-use properties were included if 50% or more of the space was used as offices. When multiple brokers shared a listing, the dollar credit was divided evenly, but each broker was credited with one property. Only brokers for sellers were given credit. Portfolio transactions were included if the overall price was at least $200 million or any property in the portfolio had a value of at least $25 million.