This article is adapted from the Third Quarter 2010 issue of Global Capital Trends. It is presented here for the benefit of our US subscribers.

Despite the sluggish economy and mountains of troubled property loans that continue to plague banks, prices for top office properties selling for $10 million and above  in London, Paris, New York and Washington, DC appear to defy gravity. A contingent of capital is focused on these markets, leading to competitive bidding for properties that is driving prices up and yields down. Much of the capital is cross-border, which has also caused yields in these fabulous four markets to align with each other. Prime yields for office properties in London and Paris have become more correlated with yields in New York and Washington, DC than to yields in other markets in Western Europe.

These four favored markets have dominated office acquisitions in 2010, with London and Paris accounting for 45% of all office transactions in Western Europe, while New York and Washington collectively represent 35% of US office sales. In each of these four favored markets, cross-border investors account for a large share of acquisitions and help keep prices aligned. Foreign buyers account for over half of office transactions in London and Paris and one-quarter of deals in New York and Washington, DC.

Consequently, over the past two years, prime yields in London and Paris have averaged 50 bps below prime yields of New York and Washington, DC, with little variation. However, over the same period, prime yields in London and Paris have ranged below office yields averaged throughout Western Europe by as much as 200 bps. Similarly, prime yields in New York and Washington, DC have ranged from 50 to 300 bps below the US office average while maintaining the tight 50 bps trading band to London and Paris.

The fact that markets on different continents are trading in such parity to each other underscores the increasingly global nature of commercial real estate investors.