January 17, 2019
While the prices of high-quality office product in primary markets, such as Los Angeles and New York, continue to skyrocket, many investors are apprehensive about spending capital in areas that have potentially reached their peak. Instead, these yield-hungry investors are flocking to second-tier markets in search of opportunities that offer better pricing and higher yields with more comfortable exit strategies. These qualities are drawing investors to mid-size and smaller cities across the country.
Atlanta, for example, is certainly feeling the buzz. During the past year, Atlanta’s office sector has seen a continuing surge in investor interest, with nearly $4 billion in sales. This is down from a peak of $4.8 billion in 2015, but well above the metro area’s long-term average. All this activity came from a range of buyers and buyer types, reflecting interest in Atlanta that is both wide and deep. When looking at the top office sales of 2018, what stood out the most was the sheer variety of property types and locations. We saw strong sales activity in newly constructed towers as well as older, renovated properties.
The biggest surprise, however, was the amount of interest in the suburban markets, with six out of the top 10 sales of 2018 occurring outside the Central Business District. The momentum we’re seeing in the suburbs is largely attributed to the urbanization of these areas. Neighborhoods that were traditionally suburban now offer new developments with urban amenities, such as entertainment and more public transit options, at price points that are much lower than those found in urban centers. Developers are building and renovating mixed-use projects that generate extremely successful leasing results and thus capture investor attention.
We expect to see this level and variety of investment activity continue in 2019. Suburban office markets, in particular, will continue to gain traction as more investors venture outside of city centers in search of adding greater value for their investment portfolios.