Office, Apartment Values
Continue Strong Growth

The value of office buildings made the biggest jump in two years during the third quarter while apartment values continued to post strong increases, all as leasing activity kept strengthening in both markets, according to a new survey.

The average value of office space increased 1.2% to $134.13 a square foot, from $132.52 in the second 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. That helped confirm that a 0.1% increase in the second quarter -- the first positive movement in more than a year -- wasn't just a blip.

Average apartment values surged 2.2% in the third quarter to $71,132 per unit, from $69,601 in the second quarter. It was the second-largest increase in value in the past two years, behind the 2.5% jump in the second quarter.

But the disparity between actual sales and the underlying value of offices and apartments continued to increase, with office properties selling at a 25.3% premium over their values and apartments going for 22% more. With a report out yesterday that showed the highest wholesale inflation increase in nearly 15 years, that could spell trouble down the line, says Lloyd Lynford, chief executive of Reis.

Capitalization rates -- the estimated rate of return at the time of a property's purchase -- continued to plunge as investors were willing to take lesser returns for the perceived stability of real-estate assets. In the office market, capitalization rates went down to 7.9% in the third quarter, from 8.1% in the second. In apartments, they dropped to 6.8%, from 7.1% in the second quarter.

"For cap rates to be dropping that much in the quarter in the face of inflationary and interest-rate pressures may lead real-estate investors to question the soundness of their pricing in the third quarter," Mr. Lynford says.

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