| A flight to quality is typically
experienced during any period of
market uncertainty. |
2007 Implication:
Top assets in top markets will
see less of a price correction than class B & C assets
in secondary and tertiary markets.
2008 Update:
Prices have fallen across all property
types and markets, but those in the top markets
have held up far better than others nationally as
illustrated in the table.
Because of the flight to quality, the best located
and highest quality properties have sold for
near record prices and at cap rates only slightly
higher than a year ago. Sub 5% cap rates have
been reported on recent sales of prime properties
in Manhattan, DC and San Francisco. Near record
psf prices for offices in DC and retail in Manhattan
have also been achieved.
Forward Implications:
The flight to quality that
is causing this two-tiered market between average
and top properties will continue. Buyers will
continue to seek the best leased properties in markets
with low vacancies and few developments
in the pipeline. Some may avoid markets exposed
to the rapidly shrinking financial industry, such as
Manhattan, putting in jeopardy its perception as
a top market.
Because top assets are still achieving strong
pricing and low cap rates, the flight to quality
is skewing some market statistics. For example,
the average price of office buildings sold in Q2’08
reached a record $336/sf, despite the steep falloff
in volume nationwide. This exacerbates the bid-ask
spread as sellers cling to numbers that may not accurately
reflect the quality of their own offerings.