As investors take a “wait and see” approach about where we are in the cycle and how wholesale political changes could impact markets, there are plenty of questions to go around. In the office sector, however, we may have answers sooner than we think.
The office sector saw relatively stable volumes for 2016 and ended on a positive note, but many wondered what has become of all the portfolio deals.
“There is a pent-up demand right now for portfolio and entity-level deals that we just haven’t seen a lot of in this cycle,” said JLL Director of Research Sean Coghlan. “The fourth quarter of 2016 was a good indicator of what we expect to see in 2017.”
As the chart indicates, there have been fewer large office deals this cycle. Instead, single-asset transactions have dominated the current cycle. According to JLL’s U.S. Investment Outlook, 58 percent of office transactions have been single-asset deals since 2010. By comparison, single-asset deals comprised just 49 percent in the prior cycle’s 2006-2007 peak (Note: this excludes the outsize impact of the Equity Office Portfolio).
“Investors are willing to place capital, if the mix of assets is right,” said Coghlan. “With the right composition and timing, liquidity and pricing will be strong in today’s market.”
The reason for fewer large deals is fairly straightforward, says Coghlan. The right portfolios haven’t found the right buyers, whether due to timing or asset composition, or a combination of both.
As a result, volumes for the last eight consecutive quarters have averaged about $2.5 billion below 2006 and 2007 levels.
But we’re already seeing signs of change. Three portfolios greater than $1 billion closed in the fourth quarter of 2016; they all had heavy office components.
For instance, JLL brokered the sale and completed the financing for the global Alecta Portfolio, which included 21 assets in the United States, of which nearly half were office. Blackstone purchased the U.S. portion of the portfolio for $1.7 billion, and it included nine office locations across the country.
“Stabilized and increasingly optimistic investor sentiment is expected to sustain current investment sale levels in the Americas region in 2017,” said Jonathan Geanakos, JLL’s Americas President of Capital Markets. “Following three record years of single asset sales, increased portfolio transactions will be a key factor for gains in 2017 and into 2018.”