Office values jumped 3.3 percent, the most in two years, to $138.59 a square foot in the fourth quarter from $134.13 in the third quarter, according to the study of the top 50 U.S. markets prepared by Reis Inc., a New York-based real-estate research firm.
For the year, office values were up 2.8 percent, compared with a 5.6 percent decline in 2003.
The increases reflect the quickening pace of the recovery in the office market, which had been struggling for three years because of the recession and corporate belt-tightening. Companies are beginning to expand into new space as they increase hiring, and in the fourth quarter they absorbed 20 million square feet, the most in four years. Absorption is the net change in occupied space. Rents have bottomed out and are expected to rise modestly this year and to start taking off in 2006.
But properties are still trading at a big premium to average values. Offices that sold in the fourth quarter went for an average $170.98 a square foot, a 23.4 percent premium over what Reis estimates as average value.
That is partly due to the fact that the assets that are changing hands tend to be better-than-average properties that are newer and better-leased and, thus, stabler investments. But a good deal of the disparity between price paid and underlying value is a result of the still-massive amount of investment capital seeking safe returns in the real-estate markets, said Lloyd Lynford, chief executive of Reis.
