Imagining a city almost always evokes images of its skyline. Those buildings typically form the Central Business District (CBD), and just like city skylines, no two CBDs are the same.
COMMERCIALCafé analyzed data provided by Yardi Matrix to compare the price-per-square-foot (PPSF) of buildings in some of the top CBDs in the U.S., examining both Class A and B properties that have traded in the last 27 months to determine what an investor would potentially pay for an asset in various CBDs. While variables including cap rates, occupancy and building history help determine if an asset should be purchased, COMMERCIALCafé focused on median sale price for its study.
The most expensive CBDs are on the coasts: Midtown Manhattan, San Francisco and Washington, D.C. Due to the timing of sales in San Francisco (the Class B properties in the study traded in the summer of 2018, while Class A transactions were more spread out), Class B property costs appear more expensive than Class A properties. But nothing is inexpensive: $50.75 million will buy a 70,000 square-foot Class A asset.
Washington, D.C., has a few constraints that other CBDs don’t have, such as height restrictions of 130 feet, or about 11 stories, for commercial buildings due to the district’s unique building height-street width ratio. More restrictions mean higher prices but can also lead to a more efficient use of space. A 70,000 square-foot Class A asset there would cost around $42 million. This rivals CBDs like Midtown Manhattan, where a similar asset would be $55 million.
Popularity also plays a role. Driven by education and startup culture, growing cities like Seattle; Charlotte, North Carolina; and Nashville, Tennessee, have become hot spots for office space due in large part to their lower overall asset prices and cost of living. A 70,000 square-foot Class A asset would run $37.5 million in Seattle, $17 million in Charlotte and $16 million in Nashville.
CBDs also may not be the actual centralized focus of business in their respective metropolitan statistical areas. In California, for instance, Silicon Valley is very decentralized when it comes to office building distribution and absorption. Palo Alto, Sunnyvale and Mountain View draw a lot of attention away from downtown San Jose, primarily due to large tech companies. It’s still Silicon Valley though, so Class A assets are going for almost $400 per square foot.
Prices can range widely between CBDs and between asset classes. While the bottom line is important, there are numerous factors – from investment environments to risk profiles – to consider when considering purchasing a commercial asset. The COMMERCIALCafé study includes two calculators that utilize data from Yardi Matrix to enable users to compare the prices of similar-sized assets across multiple cities as well as research office assets based on the amount to be invested.
Patrick McGregor is a senior writer at COMMERCIALCafé, covering the commercial real estate industry and overall economic trends in the United States.