Contact Us
News

California Office Sales Down, But State Boasts Healthy Pipeline Of New Office

Office investment was down in 2017 despite ongoing interest from investors in San Francisco and Los Angeles. Despite a slowdown, the office pipeline was robust with millions of square feet delivered in 2017 and millions more expected for this year. 

California Office Sales Down, But State Boasts Healthy Pipeline Of New Office
Los Angeles skyline

Using data from Yardi Matrix, CommericalCafé analyzed several California office markets in Q4. California had 288 major office deals in 2017 totaling about $22B in sales volume across seven major markets. This volume was 17% lower than the $26B in sales volume during 2016. The 2017 deals involved 60M SF of office, 11% less than the 68M SF of office in 2016.

With the exception of Los Angeles and Sacramento, all markets analyzed recorded a drop in investments last quarter. During Q4, 56 office deals totaling $4.3B closed, a 49% decrease from Q4 2016. Los Angeles and the Bay Area were the only markets to have sales volume above $1B during the quarter. Despite the high volume in the Bay Area, San Francisco recorded one of the slowest quarters for investment on record.

California markets were active in new office construction and delivered 13M SF during 2017. A majority of the new office was built in San Francisco, which includes San Francisco and San Mateo counties, and Bay Area markets, which include the South Bay and East Bay, had a combined 6.1M SF of deliveries. Los Angeles completed nearly 3.8M SF of new construction, followed by 2.1M SF of new offices in Orange County. The Bay Area is on track to complete over 10M SF of new construction in 2018 and San Francisco is expected to complete over 8M SF.

Check out how each market did in office investment activity below:

Los Angeles

 

Q4 Sales Volume: $2.2B

Q4 Number of Deals: 19

Q4 Total Square Feet: 6.1M SF

Q4 Average Price: $469/SF

Los Angeles has become a top market for investment in recent quarters and recorded the highest sales volume and average pricing of a California market. Almost half of the 13M SF of office traded in the state during the quarter was within the Los Angeles office market. The biggest office sale across the state was in Los Angeles with Starwood purchasing the Pacific Corporate Towers portfolio in El Segundo for $605M from BlackRock and General Motors Pension Trust. 

For the whole year, Los Angeles closed $7B in sales, the second-highest amount during the past five years. The highest amount of investment occurred in 2016 with $9M in sales. Average pricing in 2017 was 8% below the $424/SF average of 2016.

Bay Area

 

Q4 Sales Volume: $1.4B

Q4 Number of Deals: 14

Q4 Total Square Feet: 4M SF

Q4 Average Price: $293/SF

The Bay Area's largest office sale during Q4 occurred in December when DivcoWest and Rockpoint Group paid $284M ($473/SF) for SteelWave’s 600K SF 16-story RiverPark Towers I and II in San Jose. Bay Area investment reached about $6B for 2017, the highest amount in the last five years. Average sales pricing decreased 1% in 2017 to $339/SF compared to $346/SF in 2016. The square footage bought and sold increased 7% to 16M SF compared to 2016. Sales volume increased 17% in 2017 compared to the previous year. The largest office deal of the year in the Greater Bay Area was CalSTRS and South Korean Investment Group’s $610M purchase of Campus @ 3333 from Menlo Equities and Beacon.

San Diego

 

Q4 Sales Volume: $407M

Q4 Number of Deals: 10

Q4 Total Square Feet: 1.6M SF

Q4 Average Price: $252/SF

While sales volume decreased 58% in Q4 compared to the previous year’s Q4, last quarter was the eighth consecutive quarter with an average sales price over $200/SF. The biggest office sale of the quarter was Canadian-based City Office REIT's purchase of the 10-building Mission City Corporate Center and Pacific Center Court office portfolio for $175M, marking its first entrance into the California market.

For the whole year, sales volume totaled $1.8B and was the second-highest year on record in five years and 11% higher than 2016. Average pricing reached $311/SF for the year, a 14% increase compared to 2016, and a five-year peak.

Sacramento

 

Q4 Sales Volume: $198M

Q4 Number of Deals: 6

Q4 Total Square Feet: 923K SF

Q4 Average Price: $184/SF

Sacramento’s office market reported an increase of over 300% in sales volume in Q4 compared to the $47M reported in Q3, but was still 55% below Q4 2016 sales volume. Large fluctuations are not unusual in small office markets like Sacramento, according to CommercialCafé. The largest transaction during the quarter was Evergreen Co.’s $56M purchase of the 293K SF Natomas Corporate Center. It accounted for nearly a third of the total quarterly sales volume. Sacramento’s investment volume reached about $700M for the year, its second-highest sales volume in five years. The office market had 20 major deals involving 3M SF.

San Francisco

 

Q4 Sales Volume: $105M

Q4 Number of Deals: 2

Q4 Total Square Feet: 227K SF

Q4 Average Price: $465/SF (Due to low sales volume, price may not be reliable average)

Despite significant leasing activity in San Francisco during Q4, the office sales activity slowed down significantly and was the slowest quarter in the past five years. Only two transactions were completed in the San Francisco market, which includes the Peninsula. Sales volume decreased by 96% compared to Q4 2016. The largest office sale was Gemini Rosemont’s acquisition of the 158K SF Class-B office at 600 Clipper Drive in Belmont.

Overall, 2017 marked a slowdown in sales volume with $3.6B, the second-lowest dollar amount in the last five years. Compared to 2016, sales volume decreased by 58%. Even though investment activity slowed, San Francisco has the highest average pricing in California at $552/SF.

Orange County

 

Q4 Sales Volume: $63M

Q4 Number of Deals: 3

Q4 Total Square Feet: 310K SF

Q4 Average Price: $203/SF

Orange County had a slow quarter with only three deals completed, representing only 4% of the county's annual total volume. The biggest deal of the quarter was Hines and Oaktree's $27M purchase of the Pacific Sunwear Global Headquarters in Anaheim. Despite a slow Q4, 2017 was the second-highest year for investment within the last five years with $1.8B in sales. Office investments rose 4% compared to 2016, and average pricing reached a five-year record of $247/SF.

Inland Empire

Q4 Sales Volume: $29M

Q4 Number of Deals: 2

Q4 Total Square Feet: 147K SF

Q4 Average Price: $205/SF (Due to low sales volume, price may not be reliable average)

The Inland Empire, which primarily consists of industrial properties, completed yearly sales of $324M, about the same volume as 2015. The largest office deal of Q4 was TA Associates Realty's sale of Empire Corporate Center for $16.5M to MGR Real Estate.