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Office properties traded at a strong clip in 2018

January 15, 2019

Source, Philadelphia Business Journal, Natalie Kostelni

Suburban office sales in 2018 totaled $863.6 million, which was nearly double the $447.4 million laid out to buy office buildings in Philadelphia’s Central Business District, according to Real Capital Analytics data.

That’s in contrast to 2017 when office properties totaling $929 million traded in the CBD compared with $864 million in the suburbs, according to Real Capital data. What the 2017 figures show is that suburban office sales were gaining on downtown transactions in terms of dollar volume and that trend was solidified last year.

The commercial real estate investment market was healthy last year across the region. CBRE Inc. data indicate a total of $1.6 billion in 18 office transactions valued at $25 million or more were recorded for the Philadelphia suburbs and Center City combined. JLL data, which calculates properties sold that were 25,000 square feet and greater regardless of the transactional amount, showed 92 transactions totaling $1.8 billion were logged last year throughout the region. That outstripped 2017 when 47 deals totaling $1.5 billion were completed.

Sales on a price per square-foot basis also improved. JLL data show the average office sale price was $180 a square foot compared with $173 a square foot. The occupancy of the properties sold averaged 93 percent, according to Real Capital, and proved money was flowing into lower risk, stable assets.

While the suburbs experienced the most sales by dollar volume, three suburban submarkets ruled. King of Prussia, Malvern and Conshohocken were the top markets to get investor attention, according to the research. Those three markets accounted for $777 million in sales, according to Real Capital. In Conshohocken, Eight Tower Bridge and 161 Washington St. were among those properties that traded while several properties put up for sale by Liberty Property Trust in Malvern and King of Prussia also sold.

That investor attention is increasingly drawn to the suburbs points to the segment’s recovery late in the economic cycle, said Robert Fahey, an investment broker with CBRE. “The best we can say about last year is the suburbs are being viewed as an appealing place to invest and that hasn’t been the case since 2010,” he said. “We expect this to continue.”

Office buildings in those three markets were also selling for strong prices at around $300 a square foot, which, on a historical basis, is good, Fahey said.

While the suburbs showed strength, it highlighted another dynamic at work these days and that’s the ongoing portfolio realignment by Liberty Property and Brandywine Realty Trust, said James Galbally, an investment broker with JLL. “There was a lot of suburban activity but the reality is Liberty was responsible for a lot of it,” he said. “Now that Brandywine and Liberty have completed much of that, that could impact the velocity going into this year.”

Transactions in Center City were curtailed for other reasons including there were such high volumes in previous years that those levels couldn’t be sustained.

Another notable trend that emerged last year is the make up of buyers also started to shift. For example, 55.5 percent of those acquiring properties in the suburbs were private entities and 35.5 percent were funds, according to Newmark Knight Frank data.

“We’re not seeing the institutions in the suburbs but private funds like Equus Capital Partners,” said Mike Margolis of Newmark Knight Frank. “Institutions look at Philadelphia and say Philadelphia doesn’t have the job growth. It isn’t on their radar. That could change. We have had better job growth over the last two years.”

Foreign capital is increasingly buying properties in the region and accounted for 40 percent of the money deployed for acquisitions, according to Real Capital.

For example, an affiliate of Korea Investment Management Co. Ltd. paid $130.5 million for the office building that houses GlaxoSmithKline at the Philadelphia Navy Yard. Arch Street Capital, on behalf of Soor Capital of Kuwait, paid $173.1 million for four buildings leased to Vanguard Group in Malvern. Funds from Chile were involved in the acquisition of 1600 Market St. in Philadelphia.

“We have seen across the country a trend of foreign capital migrating to top-tier, non gateway markets and Philadelphia has been a beneficiary of that,” Fahey said.

Investment brokers believe this year should be another good one so long as debt markets continue to fund acquisitions. Some deals that are expected to close this year include 1735 Market St., one of Center City’s premier office towers, Chesterbrook Corporate Center in Wayne, and 100 and 200 Four Falls Corporate Center in West Conshohocken.