2024 Single-Tenant Office Quarterly Sales Volume & Cap Rates
Health-care properties were among the more frequently sold assets.
Following first quarter 2024’s impressive performance, the single-tenant office sector saw transaction volume return to levels more in line with recent quarters. With $2.02 billion logged during the second quarter, the market is set to outpace last year’s activity, even if second-half office volume remains muted, which is expected.
With very few high-priced trades, the majority of investment activity over the last three months occurred in sub-$10 million assets. Health-care properties, including dialysis facilities, imaging centers and physicians’ offices, were among the more frequently sold asset types. Several portfolios also traded. Among the higher profile transactions were Novant Health’s 16-property medical office sale-leaseback and the $60.7 million sale of the Class A headquarters campus of Blue Cross Blue Shield of Minnesota.
After a 12-basis point jump in first quarter, the average cap rate for single-tenant office receded slightly, ending mid-year at 6.75 percent. This is still elevated from the 2023 year-end average and further reductions are not anticipated. What’s more likely is that the market will see additional small upticks in the final months of 2024 to continue the general upward trend seen since mid-2022.
Buyer distribution
Buyer distribution for the first half of the year remains deviated from recent years. While institutional investors continue to represent roughly one quarter of the active buyers, REIT activity has become more prominent. With 27 percent market share, REITs were the most active buyer type for single-tenant office in the last six months.
Private buyers, which have captured up to half of the market in the last two years, now only represent 25 percent. In the second half of 2024, watch for net lease health-care transactions to continue buoying the market, which could result in a greater number of private investors becoming active in the sector.
—Posted October 30, 2024.
After a challenging 2023, where only $7.9 billion in sales were recorded for the entire year, the single-tenant office sector posted its strongest quarter since late 2022. Investment sales activity showed an incredible 77.5% increase quarter-to-quarter, logging more than $3.2 billion in transactions. We have yet to see larger portfolios or other signature assets that would drive totals even higher trade frequently, but robust activity for office and medical buildings at lower price points – sub-$25 million – allowed the quarter’s transaction count to increase 76% in the last three months. While it’s too early to say if the office market is moving towards recovery, investors should be encouraged to see this latest momentum.
The most prolific buyers this quarter were public REITs, contributing to nearly half the sector’s acquisition activity. This represents a significant deviation from previous years, when REITs were present but nowhere near the top ranking. With a pullback from both private and institutional investors, public REITs were able to secure dominant market share to begin the year.
After a decade of slow, declining trendlines for net lease office cap rates, the last few quarters have reported steeper increases. At the end of first quarter 2024, average rates sit at 6.81% – up 11 basis points from fourth quarter 2023 and up 51 basis points from this time last year. The office average is now the highest recorded since year-end 2015. Rates are expected to continue climbing, although the pace of escalation is likely to slow. It’s possible we could see average cap rates for the net lease office sector surpass the 7% mark this year, but with interest in healthcare assets leased by stronger credit tenants, cap rates could just as easily stabilize.
—Posted June 30, 2024.
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