The Changing Office Investment Landscape

A new outlook is reflected in shifts in market and investor interests
by Adel Dobriban 

As we approach the 10-year mark since the recession, COMMERCIALCafé has tracked the office investment and lending landscape during a period of 20 years to highlight how the markets and investor interests have shifted and adapted to the new outlook. While some things have changed spectacularly, some have stayed the same.

Here are key findings, based on data from Yardi Matrix and Moody’s Investors Services:

Top Markets for Office Investment

The Phoenix office investment market experienced one of the more significant cool-offs compared to the 1997-2007 period, as it recorded a drop in transaction volume of 27 percent (corresponding to a value of $4.67 billion), and was pushed down three positions (from No. 12 to No. 15 on our list).

Striking differences at market-level include the general up-slope of the California markets; Chicago’s fall from the top three to the sixth position, with a $12-billion investment drop since 2007; and the Houston and Dallas markets’ ascension by 27 percent and 48 percent, with a $4- and $6-billion uptick respectively. This is also testament as to how top investment destinations have shifted in the past decade.

Buyer Landscape Shifts

The top buyer outlook has changed almost completely as well, not only regarding investment companies but also in terms of top-tier investment volumes, which registered a roughly 80-percent drop compared to the decade before the recession.

Long-heralded top player on the real estate market Tishman Speyer took a serious hit after the crisis — from first place up until 2007, it didn’t even make the top 10 after 2008. First place was nabbed by institutional investor JPMorgan Asset Management.

From the 1997-2007 top 10 buyer list, only three companies have remained in the post-recession top 10: Equity Office Properties Trust, Hines Interests and Beacon Capital. There was, however, considerable adjustments in their position: EOPT dropped from No. 2 to No. 7; Beacon Capital, from No. 3 to No. 10; and Hines Interests, from No. 5 to No. 8.

New Lending Status Quo

Lending standards have also morphed, leaving behind the risky practices of the 2000s. At the market’s post-crisis peak in 2015, loan issuance was up to 583 from 259 in 2009, the lowest issuance in 20 years.

The credit risk-retention rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act has endeavored to reign in high-risk financial practices, stipulating a 5-percent minimum shared credit risk between both the investors and lenders.

Interest rates have also aligned with the Dodd-Frank and, starting in 2010, investors and banks kept it in check — the average interest rates reached a 20-year low of 3.68 percent in 2016. Average maturity, too, has increased. It peaked in 2015 at 11 years, while, in 2008, investors were taking out loans with only seven-year maturities.

Top Markets 1997-2007

# Markets Transaction Volume
1 Manhattan $118,424,179,905
2 Washington DC $70,531,286,399
3 Chicago $48,171,211,122
4 Los Angeles $45,815,600,797
5 Boston $40,909,139,420
6 San Francisco $31,335,370,185
7 Atlanta $24,876,227,219
8 Bay Area $20,710,936,501
9 New Jersey $19,321,739,413
10 Seattle $18,383,763,462
12 Phoenix $17,020,949,653 

 

Top Markets 1997-2007

#

Markets

Transaction Volume

1 Manhattan $128,733,581,060
2 Washington DC $55,134,749,993
3 Los Angeles $45,532,699,727
4 Boston $42,102,662,811
5 San Francisco $40,240,064,320
6 Chicago $36,572,642,082
7 Bay Area $35,000,331,526
8 Seattle $23,688,833,400
9 Atlanta $20,945,876,450
10 Dallas $19,449,190,807
15 Phoenix $12,346,354,451 

 

Adel Dobriban is with COMMERCIALCafé, a nationwide commercial real estate listings platform and a part of Yardi Systems that provides original research, insight and in-depth analysis of the commercial real estate market.

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