What a difference a year made for large office sales, which rebounded in 2021 to pre-pandemic volume while Eastdil Secured continued its reign as the sector’s most active broker.
The total of $105.67 billion of office sales notched last year was a whopping 74% higher than the $60.73 billion logged in 2020, when the pandemic eroded investor confidence in the sector, tanking activity and erasing most of the gains made during the prior bull market run.
The sharp recovery, weighted heavily in the second half, approached the $109.54 billion total achieved in 2019, according to Real Estate Alert’s survey of sales worth $25 million and up. It also was the third-busiest year in the past decade.
Eastdil held on to its top spot by brokering $21.1 billion of deals, up almost 50% over the previous year. Its market share of brokered activity dipped slightly, to 23.0% from 26.3%. JLL climbed into second place from fourth with $18.7 billion, an 87.6% jump that was good for a 20.3% market share, up from 18.5%.
Newmark stayed in third place with $16.0 billion (up 60.2%) for a 17.4% market share. CBRE, typically in second place, landed in fourth with $15.8 billion of sales, a 53.6% increase. Fifth-place Cushman & Wakefield nearly doubled its volume with $13.9 billion of brokered trades.
Amid the resurgence, investors continued to favor new, stabilized properties with lengthy lease terms, particularly in the red-hot life-science niche. But buyers also proved more willing to step out on the risk spectrum for properties with compelling growth stories in favorable markets.
“Differentiation by product quality, location and tenant dynamics has and will continue to be the key driver to which specific office-deal profiles are experiencing elevated or conversely reduced transaction volumes,” said Stephen Van Dusen, an Eastdil managing director.
The year got off to a lackluster start, with just $16.0 billion of sales in the first three months. However, a swell of activity led to a record-breaking fourth quarter. Some $38.6 billion of office properties changed hands from October through December, surpassing the $37.7 billion high-water mark set in 2006. It also was the second-most active quarter ever — behind the $50.8 billion that traded from April through June in 2007.
Leasing figures also showed signs of improvement at yearend. The fourth quarter was the first since the onset of the pandemic to register positive net absorption, with leasing activity up 9.2%, according to a JLL report. Overall annual leasing volume of 156.9 million sf was 14.6% greater than in 2020.
“Despite continued uncertainty, there is more data and there is more evidence of a recovery than a year ago,” said Justin Pattner, a partner and head of real estate equity in the Americas at KKR. “As investors, that gives us a better understanding of how to evaluate new opportunities in select markets.”
He also expects improved leasing data to give buyers the conviction to move forward this year, particularly in markets experiencing population growth or that have clusters of tenants in high-growth industries such as life science and technology.
Kevin Shannon, co-head of U.S. capital markets at Newmark, said the strong fourth-quarter statistics reflect rising optimism that the coronavirus crisis is waning. “You will have more office leasing data points and more underwriting optimism the closer you get to the end of the pandemic,” he added. “That’s why I think this year is going to be a really strong year.”
Even as the omicron variant surged late in the year, once again delaying the return of workers to offices, investors remained confident in the sector, albeit for specific properties in specific locations.
“This variant has proven that we know how to deal with these challenges,” said Joe Gorin, a managing director and head of U.S. real estate acquisitions and portfolio management at Barings. “There’s obviously been a little step back in terms of people going into the office, but the light is at the end of the tunnel. High-quality assets with the ability to attract tenants that need space for collaboration and innovation will be those that recover and strengthen in my view.”
Boston, home to the country’s largest life-science cluster, once again was the most active market with a record $13.31 billion of trades, an increase of 55.4% over last year. Newmark was the dominant broker in that market, capturing a 41.2% share of brokered sales with $5.36 billion.
San Jose/Silicon Valley, replete with tech and life-science companies, came in second with $10.82 billion of sales, up 75.5% over last year. Eastdil was the dominant broker there, logging $3.5 billion for a 39.7% share.
Activity was also higher in some smaller markets, landing several in the top 10. That includes North Carolina, led largely by Charlotte, in sixth place ($4.34 billion), followed by the Dallas area ($4.08 billion). San Diego, despite its relatively small footprint, came in ninth place on account of its life-science cluster ($3.58 billion). South Florida, benefiting from a wave of in-migration, rounded out the top 10 with $3.54 billion.
New York, the country’s largest and historically most active office market, climbed back into third place with $8.92 billion of sales, after falling to sixth place in the midyear rankings. That’s still well behind its 2019 volume of $17 billion. A surge in fourth-quarter leasing activity, coupled with several massive pending sales, has pros optimistic about a comeback for the city this year.
“Those are both signs of green shoots in the office space,” said Jonathon Blackwell, chief investment officer at Waterman Clark, which is targeting office buildings in New York and other major East Coast cities. “In New York City, there is no shortage of capital for well-leased, well-located buildings, and there is significant demand for the very best developments.”
But the return of buyers for properties that don’t fit that profile has been more muted. “We are waiting to see the capital markets speak on the buildings right in the middle,” Blackwell said.
Other major urban markets saw ongoing uncertainty about the office sector keep a lid on the recovery of investment-sales volumes. They include: San Francisco ($3.70 billion, up 27.2%), Washington ($2.67 billion, up 9%), and Chicago ($903 million, down from $1.32 billion).
Going forward, investors see the potential for more properties to hit the block as owners choose to sell rather than grapple with leasing challenges. “A number of owners and sponsorship groups are still confronting the realities of lower office occupancy and other elements … brought on by the pandemic,” said Adam Sklar, managing principal and co-head of real estate at Monarch Alternative Capital. “There will be a continued incremental supply of office assets as those ownership groups look to monetize.”
Monarch, in partnership with Tourmaline Capital Partners, is buying office properties in the Sun Belt and secondary markets.
Going forward, pros believe that the return of both workers and capital to offices is inevitable. “This next year should be the year of the office,” said Doug Harmon, chairman at Cushman. “There’s just too much capital that will not be satiated with niche [office] product.” With $300 billion chasing commercial real estate properties, investors will need to look beyond the industrial and multi-family sectors, the current darlings of the market, he said.
The huge amounts of dry powder also likely will lead to much larger transactions in the year ahead. “We see the formation of capital that would prefer to do large deals across all product types, including a rotation back to office,” said Michael Leggett, a JLL senior managing director and office group leader. That, he noted, could spell a record year for office sales.
At the same time, brokers expect buyers to expand their appetite beyond the core single-tenant, net-leased offices that offered more security amid the pandemic. Demand is expected to rise for high-quality multi-tenant properties in prime locations that have just enough remaining lease term to muscle through the near-term uncertainty, said Chris Ludeman, CBRE global president of capital markets. “If you fit into those categories, the capital interested, the bidding pools will widen and deepen and we will work back to 2019 pre-pandemic appetite for office product,” he said.
Broker rankings are based on property transactions that closed in 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 package price was at least $25 million.