The disconnect between public valuations of office properties and private valuations of the asset class is growing more extreme, according to new research released by JLL. Public pricing of office REITs has been in free-fall, leaving implied yields at a level that is 200 basis points higher than those seen at the end of the Great Recession. In January 2010 REIT implied cap rates were at an average 7.1 percent and transaction cap rates were 8.45 percent. In April 2023, implied cap rates soared to 9.8 percent, while transaction cap rates rested at 7.35 percent.
JLL points to the 11 increases in the interest rate since March 2022 as the reason for the drop in asset valuations and increase in yields. Once interest rates level off and, presumably start their slow retreat, the upward pressure on yields will begin to diminish. Until then, the sizable disparity between public and private office property valuations will continue to negatively impact sales of office properties. When sellers are unwilling to drop the price of their offering, and buyers are expecting a discount, fewer sales transactions reach completion. And JLL notes that with the highly discounted office REITs, investors are able to purchase REIT shares at prices that are more palatable than those that are directly attached to an individual property. For the foreseeable future, investment activity in the office sector will continue to be a game of resistance between sellers’ price expectations and buyers’ willingness to pay.