Double-Digit Current Cash Returns Offered By High Occupancy U.S. Suburban Office Assets

December 22, 2016

In the United States, the overall office market recovery continues to drive up pricing with tightening cap rates in core CBD markets. However, suburban office cap rates on average are at least 1% wider than CBD office cap rates.


Since the beginning of 2012, suburban markets have accounted for a whopping 87% of office demand which is 13% more than their ‘fair share’ based on the total market size compared with CBD office markets. Suburban office locations are strengthening and will benefit from additional tightening in CBDs. They could also gain momentum with the potential migration of maturing millennials to the suburbs to buy homes and start families.


Moreover, from an investment  perspective, in general, suburban office portfolios can be acquired for an unleveraged 7% or higher cap rate and, when coupled with low interest rate financing, are typically providing investors with leveraged returns of between 10 – 15% cash-on-cash on a current basis (although this investment window may close if interest rates continue to rise in the U.S.).


The Carlton Group makes a market in suburban office portfolios and we currently control three portfolios which are valued at approximately $2.5 billion.  On average, these portfolios are 85% or more leased and the price per foot is typically between $100 – $150 psf which is well below replacement cost.  Moreover, the real estate statistics with regard to suburban office portfolios are quite favorable to investors as indicated by the following:


·         The average suburban asking rent gained 4.6% in the first quarter, compared with a 3.4% year-over-year increase in CBD markets, a further sign of the recovery in the nation’s suburbs, according to Robert Bach, director of research for Newmark Grubb Knight Frank, citing the firm’s first-quarter U.S. office review.


·         Suburban markets have tightened slightly faster than downtown core areas over the last year, with the average vacancy rate falling by 70 basis points in the suburbs compared with an average 50-bps decline in CBD markets, according to NGKF and CoStar data.


·         The suburban office markets have started to see gains in net absorption, occupancy and rental rates after watching their urban counterparts enjoy steady gains over the past several years. The suburban markets showed the largest increases in year-over-year demand on both a square-foot and percentage growth basis, according to analysis of first-quarter 2016 office market performance.




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Double-Digit Current Cash Returns Offered By High Occupancy U.S. Suburban Office Assets