The U.S. office sector is rebounding, but if you’re looking for a return to the broad bets being placed prior to the COVID-19 pandemic, there still isn’t much to be found, according to Real Capital Analytics (RCA).
February saw $6.6 billion in transaction volume, a year-over-year jump of 99%, per RCA’s most recent U.S. office capital trends report. Investors in this segment are remaining more cautious and pursuing more concentrated strategies these days, thus keeping the pace of transactions behind pre-pandemic days.
Nowhere is that more evident than in the pace of portfolio and entity-level deals, which are still far below historical norms even though they were up 24% year over year in February. This gain was 61% lower than the average February pace from 2015 through 2019. Individual asset sales, on the other hand, were up 113% year over year in February as investors continue to play more targeted hands.
It’s worth noting that the entity-level playing field is starting to open up across commercial real estate as a whole, even in the current risk-averse environment. The industrial segment, for example, is seeing portfolio deals return to pre-pandemic levels. Such transactions have become more financeable in recent quarters as commercial mortgage-backed securities (CMBS) originators and investor-driven lenders have ramped up activity of late.
CMBS lenders, according to RCA, came back to the office sector significantly in 2021 after a notable pandemic-era withdrawal. CMBS lenders comprised 30% of new office loans last year, up 9 percentage points from 2020 and up 6 percentage points from the average share in the five years prior to the pandemic. Additionally, the average loan size for CMBS lenders was nearly 80% higher in 2021 than it was before the health crisis.
It will be interesting to watch CMBS activity in the short term, as well as its impact on office deals, given the events unfolding on the global stage. CMBS originators are more sensitive than other groups to shifts in credit markets, and market caution is rising given both persistent inflation and the ongoing conflict in Ukraine. RCA observed that some notable CMBS issuances in the central business district (CBD) office market have been recently pulled due to caution. If more CMBS originators eschew risk and stick to the sidelines, the CBD market will feel it most, given the abundance of portfolio-level transactions in this space.
Such a hit would be unfortunate, given the lag that CBD property deals are already experiencing. While the transaction volume in CBDs was up more than 300% year over year in February, it’s more indicative of the market lull that occurred early last year than the health of the current landscape. CBD deal volume this past February was down 47% from the pace set during the same month from 2015 through 2019.
Geographically, suburban office properties continued to show the most strength, with deals for such assets up by 71% annually — although this pace remained 6% below the typical February level.