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CBD office sales pricing is growing modestly as rents climb and more foreign investment enters the market

• Since the beginning of 2017, 6.3 million square feet of Center City office space has changed hands, not including older office product sold for redevelopment. An analysis of these nine trades (which contain around 14 percent of the CBD office inventory) reveals an average per square foot price of $182 and Class A cap rates in the mid-6.0% range. This modest but undeniable appreciation is driven by an arrival of new domestic institutional and offshore capital groups seeking value-add and core-plus opportunities in a strengthening secondary market.

• Several buyers over the past five quarters have included international partners: American Real Estate Partners joined with Chile-based Independencia Asset Management to acquire 1600 Market; Wafra (founded in Kuwait) joined Nightingale’s team to acquire Centre Square; and Oaktree Capital Management partnered with a foreign capital source to buy Duane Morris Plaza. So long as fundamentals improve, this trend is likely to continue.

• Despite appreciation in the market this cycle, Class A assets continue to trade well below replacement cost, with new construction estimates running between $500-$700 per square foot. Select sales have come closer to this range in University City at around $400 per square foot, but even these figures fell far below replacement. Recent office development shows that it is not impossible to achieve the rents necessary to justify new construction, and as large blocks dwindle we may yet see more new construction this cycle. In the meantime, existing assets remain attractively priced for many investors.

Source: JLL Research  

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