Office investment has taken off in the past two years, with the national sales volume in the sector rising to about $40 billion in the second quarter. However, even though primary markets continue to be in high demand among both domestic and foreign buyers, investors’ attention has been shifting to secondary markets in the past 12 months.
Office property sales in secondary markets totaled $8.5 billion in the second quarter, representing the strongest quarter since the recession and a 19.6 increase from a year prior, according to commercial real estate services firm JLL. Andrea Cross, head of office research for the Americas at real estate services firm CBRE, says the voracious demand for office buildings in primary markets, especially by foreign investors looking to buy where they are comfortable, has pushed down available yields.
“In the secondary markets, the returns are higher,” she says. “You’re looking at 4 percent cap rates in the major cities, but up to double that in cities such as Minneapolis. Plus, the secondary MSA’s are experiencing the same growth in fundamentals, such as increased employment.”
Add in the current urbanization movement, and secondary cities become extremely attractive to investors, Cross says.
Here are the top five secondary office markets to watch, according to national office experts: