Real Estate Alert: Office Sales Rise in H1; Eastdil Tops Ranking

Sales of large office properties posted a healthy gain in the first six months, while Eastdil Secured retained its crown as the sector’s most active broker.

A total of $36.6 billion of office properties traded in the first half, up 26.5% over the year-ago period, according to Real Estate Alert’s Deal Database of sales worth at least $25 million. That represents a partial recovery from 2020, when the pandemic contributed to a 44.4% decline in annual office sales.

Since the onset of the pandemic, investors concerned about prospects for leasing growth in urban markets largely have favored properties with core profiles and longer average remaining lease terms. But pros believe that the return of more workers to offices after Labor Day also will yield more leasing activity, and investors will be more comfortable moving out on the risk spectrum.

Eastdil worked on $9.5 billion of office trades in the first half, good for a 28.5% share of the $33.3 billion of brokered deals. The firm’s activity increased 79.3% year over year, the largest bump by far among the top five brokerages. JLL landed in second with $5.7 billion, up 17.1% over the same period last year. That amounted to a 17.2% market share. CBRE, in third place, captured a 16.2% market share with $5.4 billion of activity, roughly flat with last year. Rounding out the top five were Newmark with $5.2 billion, up 2.1% (15.6% market share), and Cushman & Wakefield with $4.5 billion, up 33.6% (13.4% market share).

“That is a very positive beginning of a recovery,” said Sarah Lagosh, a managing director in Eastdil’s Boston office, noting that the first few months of 2020 included a robust pipeline of deals held over from 2019 that propped up activity. “Directionally, that is a good indicator of where we expect market transaction volume to be.”

In the months ahead, brokers and buyers believe the pace of office trades will pick up thanks to wider vaccine distribution and more workers returning to offices — easing concerns about the impact of work from home on leasing performance. “Given our expanding and pending book of business, we believe capital is anticipating a better recovery for office performance than thought a year ago,” said Chris Ludeman, global president of capital markets at CBRE.

The recovery so far has been patchy, as investors continue to favor office properties with assured long-term income and those in niche sectors or markets that provide clarity in leasing and rent-growth projections. “There are deep pockets of liquidity in certain parts of the office market, and in other parts, it’s very, very shallow,” said Justin Pattner, a partner at KKR and head of the firm’s Americas real estate equity practice.

The deepest pockets were for high-quality properties occupied by single tenants with long-remaining lease terms. Meanwhile, labs and properties used by life-science companies continued to be an investor favorite, thanks to the red-hot leasing demand that persisted through last year’s downturn. Life-science properties represented some 30% of front-runner Eastdil’s activity in the period.

The Boston area, with the country’s largest concentration of life-science properties, once again ranked as the most active office investment market in the country. Its $6 billion of sales in the first half were dominated by high-profile lab trades spanning the risk spectrum. It first claimed the top spot in 2020. San Jose/Silicon Valley, with its concentration of life-science and tech firms, ranked second with $3.8 billion of sales.

Overall, offerings remained muted throughout the first half, restraining activity. “It’s been shallow compared to most years,” said Angelo Bianco, a managing partner of CP Group. The Boca Raton, Fla., company still managed to pull off several acquisitions, including the $225 million purchase of the 692,000-sf One Biscayne Tower in Miami in a joint venture with Rialto Capital and Sabal Capital. But in many cases, he said, owners are unwilling to sell into a market where risk is priced more conservatively. “The consensus is that if you don’t have to make a decision, kick that can down the road.”

That was particularly true for multi-tenant properties with shorter remaining average lease terms. With the leasing market largely stalled, so, too, were offerings and sales of such properties. But in roughly the last eight weeks, owners have begun to see an uptick in precursors to leasing activity. “Tour activity is up across all of our markets right now, and that’s a leading indicator of space planning going forward,” said Chad Phillips, global head of office at Nuveen Real Estate, with oversight of its $24 billion portfolio. The upshot: Owners “are going to be more comfortable coming to the market with deals,” he said.

In the second quarter, “leasing improved meaningfully” and provided “glimpses of the beginnings of a resurgence,” according to a JLL national office report. Gross leasing totaled 34.7 million sf between April and June, making it the first quarter since the onset of the pandemic to cross the 30 million-sf threshold. Meanwhile, occupancy losses slowed, “demonstrating that an inflection point has arisen.” But the report doesn’t factor in the rise of the virus’s delta variant, which is causing another spike in infection rates, and whether that could affect the return to offices.

But should leasing continue to improve, investors will follow suit and, in some markets where leasing is picking up, they already have. “Where you see strong certainty in fundamentals, the underwriting follows and you see strong investor demand,” said Jaime Fink, a senior managing director and office group leader at JLL.

Some of the best-performing markets last year were in Sun Belt cities, which are benefiting from population growth and stronger leasing activity among firms looking to open outposts in less costly areas.

That was reflected in the data showing the nation’s most active markets. After Seattle, which claimed third with $2.1 billion in sales, two newcomers crept into the top five: South Florida placed fourth, with $2 billion, followed by the Dallas area at $1.94 billion.

New York, the country’s largest office market and a perennial leader in sales, saw volume plummet 50% to $1.93 billion, dropping it into sixth place. Like other gateway cities, it was hit hardest by work-from-home orders that emptied offices at the onset of the coronavirus crisis.

New York’s sluggish first half was no surprise given investor hesitancy for big-ticket purchases, the lack of foreign buyers able to reach the market and lackluster leasing fundamentals — all due to the pandemic, said Doug Harmon, chairman of capital markets at Cushman. Those gray areas are slowly melting away, and as the coronavirus crisis fades, he noted that investors are resurfacing and looking first at high-quality buildings in the best locations.

“Every time the New York market is knocked down or written off, it emerges stronger, more vibrant, and more valuable,” Harmon said. “Today is no exception, as there is still no more exciting place to work, or more diverse home for talent than New York City. That is the backbone for long-term market health.”

Similarly, major markets like San Francisco ($1.15 billion) and Washington ($1.09 billion) tumbled out of the top 10 most active markets. Chicago, meanwhile, fell out of the top 20, logging just $497.5 million of sales.
Nevertheless, brokers are taking an optimistic view of the coming months. “As we put the pandemic further in our rearview mirror, we will have more leasing data points for investors, and that will lead to more velocity,” said Kevin Shannon, co-head of U.S. capital markets at Newmark. “The pipeline looks like it will create a much stronger second half, but it’s still not going to be at 2019 sales levels yet.”

Buyers flush with dry powder and seeking higher returns than can be found in asset classes such as industrial and multi-family are expected to return to the office market. “Firms buying in 2021 and 2022 are going to get really good, attractive acquisitions,” Fink of JLL said. “You’re going to see more positive headlines as people continue to return to the office after Labor Day.”

Overwhelmingly, the consensus is that the biggest upswing in volume will start early next year. “First half of 2022 is when we expect an acceleration in transaction activity,” Lagosh of Eastdil said.

Broker rankings are based on property transactions that closed in the first six months of 2021 and involved full or partial stakes valued at $25 million or more. When multiple brokers shared a listing, the dollar credit was divided evenly, but each broker was credited with one transaction. Only brokers for sellers were given credit. Portfolio transactions were included if the overall price was at least $200 million or if at least one property in the portfolio had a value of at least $25 million.