For Adventurous Investors, Suburban Building Investments May Soon Eclipse Yields on Downtown Possessions

As Trophy Home Rates Continue to Rise, More Financiers Warm Back Up to Benefits of Suburban Office Characteristics

Prudential Insurance acquired a five-property portfolio in the Highland Oaks office park in Tampa, FL, for $111 million, one of the larger suburban office purchases of 2015.
Prudential Insurance coverage obtained a five-property profile in the Highland Oaks workplace park in Tampa, FL, for $111 million, one of the larger rural workplace purchases of 2015.

Rural workplace building, long dismissed by market viewers as realty relics to an age gone by as employers increasingly follow educated young professionals and their current choice for downtown places, may be positioned for something of a return, Marcus & & Millichap experts said today.

While downtown office assets continue to attract remarkable occupancy, lease development, cost growth and other procedures of operating performance, suburban workplace parks may present financiers with the supreme contrarian play, providing perhaps higher upside prospective relative to pricier CBD assets, stated Alan Pontius, Marcus & & Millichap senior vice president and nationwide director of commercial property groups, during a webcast today provided on U.S. workplace market trends.

“Downtown towers still get all the interest, but there’s a tremendous quantity of sales volume and activity in the suburbs that we must not lose sight of, specifically throughout this part of the cycle,” said Pontius, who was joined on the webcast by John Chang, very first vice president, research study services; William Hughes, senior vice president, Marcus & & Millichap Capital Corp. and Ashley Powell, senior vice president with Woodland Hills, CA-based investment advisor Bentall Kennedy.

“The suburbs, even a year ago, were deemed dead and illiquid. However this is beginning to move right now and there’s ample trading in the suburban areas, throughout a time that I would say has the capacity for rebounding activity,” Pontius said.

While overall office appraisals are still about 8 % below peak levels throughout the last decade, rates have actually appreciated steadily at a typical rate of 5 % each year because the recuperation started, Marcus & & Millichap reported, while average cap rates are continuing to trend lower at around 7.3 %,

Rural buildings accounted for 77 % of trading activity based upon trailing 12-months overalls for sales of office homes of between $10 million and $25 million in 46 significant U.S. metro areas, according to Marcus & & Millichap.

Previously this year, CoStar reported a boost in opportunistic and value-add plays, numerous involving job danger that commonly goes hand in hand with suburban workplace investments, with purchasers enticed back into the market by large pricing spreads in between well-leased properties above 90 % occupancy and tenancy questioned structures in between 50 % and 75 % tenancy.

One recent example of the increasing investor appetite for well-located rural possessions is the $111 million sale previously this month of a five property portfolio in the Highland Oaks workplace park in Tampa, FL area. Prudential Insurance coverage Co. purchased the portfolio totaling 575,852 square feet. Likewise last month, Metropolitan Life Insurance coverage Co. offered two office parks in Miramar, FL, to Greenwich, CT-based Starwood Capital Group for a reported $82 million.

Those offers follow the $1.1 billion sale earlier this year of a suburban profile of 6.7 million square feet throughout 61 buildings and 57 acres of land by Indianapolis-based Duke Realty Corp., sold to a joint endeavor with the affiliates of Starwood Capital Group, Vanderbilt Partners and Trinity Capital Advisors.

While pricing of CBD asset deals of $1 million or greater has actually risen 39 % since bottoming out in 2009, the solid 27 % cost increase considering that suburban buildings strike their trough in 2010 pencils out to a prospective value chance for investors seeking reprieve from downtown prize possession pricing, Chang stated.

“While there’s definitely some upside potential right here for both downtown and suburban assets, the suburbs may be a bit more of a value opportunity,” Chang said, keeping in mind that rural cap rates are still dripping lower and might see some more compression, while downtown possession cap rates will likely support in the sub-6 % range.

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