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Key Takeaways

Macro Capital Trends

• Gateway office markets continue to attract high levels of institutional capital, recording more than $80 billion in investment volume in 2019—nearly 60% of all office volume in the United States.
• The major gateways outperformed their non-gateway peers in terms of overall investment sales volume growth, recording a 5.4% year-over-year increase in 2019, compared with a 2.2% increase in non-gateway volume.
• As yields continue to compress in multifamily and industrial sectors—a trend that will likely continue throughout 2020—some investors have pivoted back toward office in search of better risk-adjusted returns.
• Various suburban office markets, within the larger gateway metros—such as San Jose, Cambridge, and Arlington—have undergone sizable growth in the current cycle, with the delivery of top-quality product attracting record amounts of institutional capital.
• Specialty asset types—such as R&D space with dry and wet lab components—are attracting an increasing amount of institutional investment, both due to the long-term growth prospects of the life sciences and technology industries, as well as a limited amount of new supply.
• International groups continue to allocate the most capital to core and core-plus gateway office product, with groups from Canada, Germany

Investment Fundamentals

• With low benchmark interest rates and increased competition among lenders, debt remains historically inexpensive at a point in time where liquidity and transaction volume are at a near-cycle high.
• Of the $154.5 billion in office financing activity in 2019, more than 64% occurred in the gateway markets, led by the national banks such as Wells Fargo and funds such as Blackstone.
• Capital on the sidelines remains plentiful, as closed-end funds with a U.S. focus have an estimated $186 billion in dry powder, a record high this cycle.

Debt Market

• The significant appetite for office space from technology firms has been a persistent theme across all gateway metros and has led to the transformation of markets such as Midtown South in Manhattan, the Seaport District in Boston, Pioneer Square in Seattle and Culver City in Los Angeles.
• Seattle was the recipient of the second most capital in the country after Manhattan in 2019, aided by a strong construction pipeline that has delivered a record amount of Class A product to market, and fueled by strong leasing and demographic trends.
• Boston’s CBD remains one of the most liquid office markets in the country, but institutional investors have also increasingly targeted suburban product on Boston’s Urban Edge, in markets such as Watertown and Waltham.
• Institutional investors allocated far more capital to Dallas in 2019 compared with the last cycle peak in 2007 and have been swayed by its large supply of newer-build Class A product, a strong job market and the ability to attract corporate hubs and headquarters.

Gateway Market Analysis

• In the largest gateways, pricing in top submarkets remains close to peak, bolstered by an expanding roster of tech and coworking tenants, while less desirable submarkets have seen moderation or decline.