In early 2018, Younger Partners noticed a surge in office properties that have been marketed for sale, far above the norm we’ve seen over the past several years. Part of this increase in properties for sale is certainly tied to interest rates and the anticipated movement in cap rates that are expected to follow. In early 2018, there was more than 11 million square feet of office properties being marketed for sale. Since then, the number and square feet of office properties available for sale has steadily increased and now is more than 17 million square feet.
The thing is, the most active parts of the office investment market in DFW seem to be at either end of the risk spectrum, with large built-to-suit investments like State Farm’s Richardson campus that sold in late 2016 as a sale-lease back for $400 per square foot. Institutional investors prefer core, Class A properties and the large built-to-suits are generally very low risk. In fact, most are single tenant assets with 10 to 15-year leases. Some of the current inventory is similar to this, like AT&T’s Whitacre Tower, in the Dallas core, which is currently for sale.
The other end of the spectrum are the high vacancy properties, which are commonly referred to as value-add. These vacated properties (which, in many cases, are the old locations for new built-to-suit projects) can be an attractive investment for investors with a higher appetite for risk.
In late 2017, International Plaza I and II were vacated by JPMorgan Chase and Fannie Mae (both tenants moved into new built-to-suit properties in the Legacy area) and the two properties were then sold in early 2018 for $152 per square foot. These two adjacent properties are currently one of the largest contiguous blocks of Class A space in DFW. Sometimes the vacated properties go through distressed sales, where the banks take back possession or they sale at foreclosure auction. The former Zale Corp. property at 901 Walnut Hill Lane in Irving went through foreclosure in October 2017.
Outside of the extremes, there are more investment grade office options currently available in DFW than we’ve seen in well over a decade. With so much inventory available, sales transaction volume will either be delayed due to lack of buyers, or a record number of office properties will trade hands in 2018. Currently the market is already on pace to surpass 2016, which was the highest year this business cycle.
Steve Triolet is the research director at Younger Partners.