In one section of its Fall 2022 Sentiment publication, LightBox mentioned fears about inflation and a recession for CRE investors. But perhaps the focus should have been on the fundamentals of economics when it came to an analysis of the office sector later in the text, because one dynamic initially seemed strange.
As LightBox pointed out, the office sector’s first half in 2022 compared to the same period in 2021 displayed an odd dynamic: volume was significantly up but prices were significantly down in a number of countries.
Except for the Bay Area, in which all areas had an increase in sales volume, most cities experienced a decrease in PSF pricing, the company reported.
According to data from CommercialEdge that LightBox looked at, there were $52 billion in transactions nationwide in 2022 as opposed to $36.9 billion in 2021. This year’s average price per square foot was $265, down from last year’s $288.
The Bay Area claims that overall deal volume decreased from $4.8 billion to $2.64 billion for five major metro areas, while prices decreased from $584 per square foot to $491. It makes sense; if activity decreases, you may assume that there will be less demand, which will lead to lower costs.
There was around $2.5 billion in total office purchases, but prices per square foot were $512 in 2021 and $440 in 2022. L.A. witnessed something of a reversal: $2.3 billion in overall deals; $1.3 billion at $343 per square foot in 2021; and $482 per square foot. In Manhattan, the price dropped from $1,192 to $892, with a total of $2.85 billion. In the same year, Seattle saw volume increase from $1.8 billion in 2021 to $2.33 billion this year, prices increased by 38.9%, from $343 to $482.
Because the pricing is based on data collected over a half year, the decreases indicated may not accurately reflect the decline from property high points. Consider Manhattan, where the Q1 average price was $921, while Q2’s average price was $880. In 2021, the midyear cost was $1,249 per square foot, which is a 70% decrease from the latter number.
Technically, what LightBox claimed is true: “This is a reflection of the softening office investment market as investors reprice assets to fit market conditions.” The what, though, not the why, is that In some of these locations, such a repricing resembles a fire sale, which is another euphemism for asset repricing but one that can cause greater anxiety.