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October 31, 2016

Cap rates are below prior peak levels, yet real estate capital markets remain liquid across debt and equity.

While Q3 brought a strong and sustained appetite for higher yielding opportunities outside primary markets, the pricing gap between primary and secondary markets remains at an all-time high and well beyond historic expansionary cycle norms, according to JLL’s Q3 U.S. Office Investment Outlook. With this, cap rates continue to compress but at a moderating pace: Where are office cap rates going across these different market segments? Is the pricing gap representative of the risks associated with these markets?

  • Nearly two-thirds (65.6%) of the 32 largest office markets are seeing year-over-year cap rate compression. Less than one-quarter (22%) are seeing softening
  • The overall pace of annual compression is moderating (39 bps in 2015 vs. 30 bps YTD in 2016)
  • The average cap rate for primary markets is now 4.1%; the average cap rate for secondary markets is 5.2%
  • Secondary market yield discount relative to primary markets is at a historic high of 111 basis points

This infographic provides a brief overview of office pricing across the United States as of Q3 2016.

 

Where are investors finding value across primary and secondary markets?

Numerous factors, including economic, demographic, market fundamentals and pricing, must be considered when determining acquisition strategy, but regardless of these impacts, there is a clear pricing discount for secondary markets relative to primary markets. This discount is now at the highest level it has been in the last 15 years. Below are five assets located across five markets: Atlanta, Boston, Charlotte, Los Angeles and New York. Each deal is a value-add transaction that traded in 2016. Check out each deal’s specs, as well as key stats for other markets, in the below infographic.

Where are investors finding value across primary and secondary markets?

 

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