Investment Criteria and Pricing for Office Properties
The 2011 market has been described as a “trifurcated” market. We have a commercial real estate market with three distinct divisions:
• Good: Quality Properties that command higher rents and are selling at high prices in the best markets
• Bad: Distressed properties selling at prices way below 2007 prices. Found mostly in over-built markets
• Unknown: This is probably where the majority of commercial properties lie. Average properties that are on the market, attracting little interest. These properties are not the subject to dire urgency from lenders or investors .
We are still working through the worst economic crisis since the Great Depression and the worst commercial real estate market since the 1990´s. The slow market and lack of comparative sales make it difficult to price a property.
It is useful to examine the general expectations that investors have set for the Office real estate market. (Taken from a survey at the end of 2010). This acts a guide for the pricing of commercial property
Office Properties 2011: Investor Expectations Survey
Central Business District/Suburban
- Cap Rate: Going in 7.6% 7.9%
- Cap Rate: Terminal 8.1% 8.4%
- IRR Pretax: 9.1% 9.1%
Using the Going-In Cap Rate as an example: A average Suburban property in an average market with a net operating income of $100,000 would be priced at($100,00 /.079) = $1,265,823. In a challenged sub market such as Tampa Bay investors , investors will demand more than a 7.9% going-in cap rate.
The above figures are macro national trends. Drilling further down to individual sub-markets, the trifurcated market still exists, with quality properties trading at lower cap rates. Investors and Sellers need to stay in touch with the local economy, examining the vacancy and absorption and the quality of the property to decide a realistic price for an office property.
Investors/Buyers: Let us help you find an Office property. Please comment below and tell us about your office needs