- California Q3 overview—San Diego, only market to register an increase in office sales
- Top Q3 transactions in each market
- Los Angeles sales drop 55% Y-o-Y
- San Diego investment picks up steam
- Bay Area sales dip below $1 billion
- Orange county prices reach five-year high
- San Francisco price per square foot falls 28% Y-o-Y, sales drop to five-year low
- Q4 pipeline forecast
San Diego Sales Bounce Back,
San Francisco Still Priciest Market
The San Diego office market closed its best quarter in five years, with $830 million amassed in 15 transactions. Out of the seven markets we looked at, San Diego’s notable Q3 rise made for the third-highest average price per square foot and second-highest quarterly sales volume.
San Francisco remained California’s priciest office market in Q3, although its average price per square foot dipped 9% from the previous quarter. Los Angeles office sales activity consisted of more than twice the number of deals closed in San Francisco, and amassed the highest individual market sales volume of the quarter. L.A. took the crown in terms of both dollar volume and amount of office square footage traded, though it came in second for average price per square foot.
Orange County and the Bay Area fared well and each wrapped up Q3 with per-square-foot averages of over $300.
Due to low office sales activity, no average price per square foot could be calculated for Sacramento and the Inland Empire office markets in Q3.
Blackstone, Brookfield Office Properties Close Biggest Sale of the Quarter
A total of 50 deals closed during this year’s third quarter, amounting to $3 billion in sales. Looking at the largest transaction closed in each market, half of the top deals were single-asset transactions, and half were portfolios. Los Angeles is, once again, home to the largest deal of the quarter–Rockpoint Group’s purchase of 5670 Wilshire. The second market in line is San Diego, with the $207 million sale of the DiamondView office tower in East Village. These two deals together raked in more capital than the top Q3 sales recorded in the Bay Area, Orange County, and San Francisco office markets, combined.
Los Angeles Sales Volume Drops 55% Y-o-Y
L.A. wrapped up Q3 with nearly $934 million in office sales, marking a 60% drop from the previous quarter, and a 55% decrease year-over-year. Even so, the Los Angeles office market was at the top of the list this past quarter, with the highest sales volume and the most square footage traded, out of the seven markets we researched.
In terms of average price per square foot, things have been looking up, as this L.A. office market metric has been on a steady upward trend throughout the year. Averaging $396 at the end of Q3 2017, the price per square foot was 28% higher than what it was in Q2. L.A. prices have seen significant fluctuations over the past five years and, although well below Q3 2016 numbers, this past quarter rested above the five-year average and was the second-best third quarter overall, surpassed only by Q3 2016.
Rockpoint Group paid the highest price for a California office property this past quarter, when it acquired the office building at 5670 Wilshire Blvd. from The Blackstone Group and Brookfield Office Properties. Rockpoint shelled out $215 million for the 27-story office and residential tower, which is home to tenants such as Citibank, Regus, Union Bank and the Hong Kong Tourism Board.
San Diego Office Sales Pick Up Steam in Q3
One of only three quarters in the past five years to post a sales volume above $700 million, Q3 2017 marked a 340% year-over-year increase and was the most active quarter of the past two years for the San Diego office market. Picking up the slack after a particularly slow Q2, the sales volume increased 18-fold, from $46 million to $830 million, amassed in 15 transactions of properties larger than 50,000 square feet.
Moreover, San Diego’s office market wrapped up Q3 with the highest average price per square foot in five years. Resting at $358 per square foot, this past quarter’s average is 42% higher than Q2’s, and marked a 51% year-over-year increase. Q3 2017 was also the seventh consecutive quarter with an average price per square foot above $200.
San Diego’s largest Q3 office sale concluded in September, when Boston-based DivcoWest closed on the $207 million purchase of Cruzan’s DiamondView tower in the East Village. The 15-story, 305,255-square-foot Class A property was over 90% occupied at the time of sale.
Bay Area Office Sales Volume Dips Below $1B
The Bay Area office market closed Q3 2017 with a 51% drop in sales volume, compared to the previous quarter. With $638 million amassed in 10 transactions, this past quarter also marks a 57% year-over-year decrease. For an office market in which the past five-year quarterly sales volume averaged $1.3 billion, Q3 2017 marked a slump in activity second only to Q1 2016, when the tally amounted to $469 million.
The average price per square foot settled at $322 through September. While not the highest value recorded to date, it marks the sixth consecutive quarter during which this metric rested above the $300 mark. As with the Q3 2017 sales volume, the average price per square foot trend is on a downturn, according to data trailing 12 months—in Q3, the market registered a consistent 6% drop from the previous quarter, as well as year-over-year.
During this year’s third quarter, 1.9 million square feet traded in office properties larger than 50,000 square feet, on an office market which sees an average of 4 million square feet transacted per quarter, according to data from the past five years.
Of the 10 transactions to close during Q3 2017, the biggest sale was recorded in August, when KBS Strategic Opportunity REIT II completed the $155 million purchase of the Oakland City Center towers. The 367,357-square-foot downtown Oakland property includes two Class A office buildings, located at 505 14th Street and 1300 Clay Street, and was sold at 92% occupancy by Rubicon Point Partners and Canyon Capital Realty Advisors.
OC Average Price Per Square Foot Tops $300 First Time in Five Years
In terms of average price per square foot, the Orange County office market is looking up. With average prices resting at $348, Q3 2017 marked the sixth consecutive quarter to surpass $200 per square foot, and the first time since 2013 when this average topped the $300 mark. Q3 closed at 49% above Q2 values, and 22% higher year-over-year.
Over the past five years, both the number of transactions per quarter and the quarterly sales volumes, have fluctuated significantly. Therefore, although Q3 2017 closed with six recorded transactions totaling a sales volume of $369 million, it’s been a solid quarter overall for the Orange County office market, and fundamentals are likely to rebound within the next 12 months. As is, 2017’s Q3 sales volume has dropped 30% from the previous quarter and 11% year-over-year.
The biggest O.C. deal of the third quarter was the sale of La Palma’s Centerpointe office park. A Greenlaw Partners and Westbrook Partners joint venture paid TA Associates Realty $106 million for the 10-building portfolio. The property includes over 321,000 square feet of office space in three mid-rise office buildings, six single-story R&D buildings, and one single-story retail strip center.
San Francisco Sales Drop to Five-Year Low
Quarterly dollar volume and amount of square footage traded have been slipping since Q4 2016. The San Francisco office market wrapped up 2017’s third quarter with a sales volume of $282 million, which is a 63% drop from the previous quarter, and an 87% decrease year-over-year. Q3 2017 is the second-lowest quarter in five years in terms of sales volume, after Q3 2013, which amassed $278 million in sales.
Although Q3 2017 is the sixth consecutive quarter with a price-per-square-foot average above the $500 threshold, this metric has been dropping since Q3 2016— marking a 28% year-over-year decrease. Granted, 2016’s third quarter averaged a five-year record-high price per square foot of $701, which carried through the fourth quarter, as well, before dipping below the $600 mark at the start of this year.
San Mateo office property trades in biggest deal of the quarter—Bridge Investment Group paid $82 million for the three-building Alameda de las Pulgas office campus. The seller was Blackstone affiliate Equity Office Properties Trust, which had owned the property since November 2016. LEED Gold-certified and located directly off Highway 92, the portfolio was 98% occupied at the time of sale.
Q4 Pipeline Forecast – 11MSF Scheduled to Come Online by Year-End
Roughly 3.5 million square feet of office space were completed in Q3 across the seven California markets we analyzed and 11 million square feet are scheduled to come online during Q4. The better part of the forecasted office pipeline, approximately 7.3 million square feet, is concentrated in the San Francisco and Bay Area office markets. Among the largest soon-to-be-completed California office projects is the Salesforce Tower at 415 Mission Street, in San Francisco’s District 9. The 61-story, 1.4 million-square-foot high-rise developed by Hines and Boston Properties is anchored by a 15-year, 714,000-square-foot lease with cloud computing giant Salesforce.com, which also secured naming rights for the building.
Orange County is home to California’s other large-scale office project scheduled to come online in Q4—the 1.1 million-square-foot Five Point Gateway campus in Irvine, developed by Broadcom, is nearly complete. Most of the four-building campus is leased to Broadcom, FivePoint, and Lennar.
The Bay Area office market will soon welcome the Moffett Towers Building 1 and Building 2, totaling 701,000 square feet. Meanwhile, the largest project underway on the Los Angeles office market is the three-story, 318,000-square-foot creative office development at 777 South Aviation Boulevard in El Segundo.
- Data source: Yardi Matrix;
- Transactions of completed properties, recorded up until October 9th, 2017;
- Minimum amount per transaction: $5,000,000;
- Square footage parameters: properties larger than 50,000 square feet;
- Sales volume includes ownership stake, controlling interest and remaining interest deals
- We count portfolio deals as single transactions;
- In the case of mixed-use assets, only properties featuring over 50% office space were taken into account;
- We excluded ‘ownership stake,’ ‘ground lease,’ ‘controlling interest,’ ‘portfolio’ and ‘undisclosed’ deals from our calculation of the average price per square foot;
- We excluded distressed sales.