Office Values Edge Up;
Apartment Rates Soar

The value of office buildings in the U.S. increased slightly in the second quarter amid strong economic growth, ending a streak of five quarters of declining values, while apartment values soared, reversing a big drop in the first quarter, according to a new survey.

But signs in June and July that the economy has hit a soft spot, especially in job growth, point to uncertainty ahead for valuations.

The average value of an office building edged up 0.1% in the second quarter to $132.52 a square foot from $132.33 in the first quarter, according to the survey of the top 50 U.S. markets prepared for The Wall Street Journal by Reis Inc., a New York-based real-estate research firm.

In the apartment market, values jumped 2.5% in the second quarter to $69,601 a unit from $67,884 in the first quarter. That's the biggest increase in nearly two years.

Office values stabilized in the second quarter as tenants absorbed more than six million square feet of space, the most in more than three years. Effective rents were down just 0.4%, signaling the office market may be nearing a turning point after three years of plummeting rents.

But turning the corner will depend on the economy creating the jobs that fill up office space. "The sector is not out of the woods," said Lloyd Lynford, chief executive of Reis.

The average price of office buildings sold in the second quarter was $164.58 per square foot -- 24% more than the value of an average building.

As capital keeps pouring into real estate and capitalization rates continue to fall, investors are now placing riskier bets on lower-quality buildings. Capitalization rates are the estimated rate of return at the time of purchase. They fell to an average 8.3% in the second quarter for office buildings from 8.4% in the first quarter.

"Cap rates can't go down much further," said Nicholas G. Buss, vice president for research at PNC Real Estate Finance in Pittsburgh. "It would concern me if they did."

Meanwhile, the average price of apartment units sold in the second quarter was $79,135, a 14% premium over what Reis estimates as the average value. Capitalization rates for apartments fell to 7.2% in the second quarter from 7.4% in the first.

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