Office building values increased 1.7 percent in the first quarter, down from a rise of 3.3 percent in the fourth quarter, according to the report prepared by Reis Inc., a real-estate research firm based in New York. That puts the average value of a U.S. office building in the country's top 50 markets at just under $141 a square foot.
Meanwhile, the value of apartment properties rose only 0.8 percent to $72,705 a unit in the first quarter, down from an increase of 1.4 percent in the fourth quarter, Reis said.
The value of a building is based on the income it generates. The value is calculated by taking the income that the building throws off and dividing it by the cap rate, which is the return investors get in the first year they own the building.
Building values take into account all buildings, whether or not they changed hands. The slowing increases in values suggest that while office and apartment fundamentals are improving, they aren't rising as fast as prices have — or as much as buyers expected.
The commercial real-estate investment market has been red-hot in recent years as investors fled the collapsed stock market in favor of bricks and mortar. Low interest rates made borrowing cheaper, and banks were more than willing to make lucrative real-estate related loans. Capital flowed in, leading to bidding wars for prime properties, and lifting the average price of office and apartment buildings higher, which pushes cap rates lower.
Investors proved especially willing to pay substantial premiums over value for office buildings. They paid a premium of 25.8 percent in the first quarter, the highest premium since the index started in 2003, compared with 23.4 percent in the fourth quarter. The average price paid for an office building was $177.31 a square foot in the first quarter, compared with $170.98 in the fourth quarter, according to Reis. That is the highest average price since Reis started its value index in the first quarter of 2003.
Still, office-building values rose more slowly during the first quarter, as net operating income lagged. Rents collected by landlords have fallen 47 percent since peaking in 2000, to $15.42 a foot in 2004 from $28.92, according to New York-based tenant representative firm Studley's Effective Rent Index.
