By Mark Heschmeyer on CoStar

Fundamentals in U.S. office markets appear to have stabilized and are headed toward an expected recovery, according to CoStar Group in its The State of the U.S. Office Market: Mid-Year 2010 Review & Forecast.

In its detailed quarterly analysis of the U.S. office market, CoStar Group confirmed positive net absorption for the quarter and office vacancy rates that appear to have peaked and are no longer rising.

“As we anticipated two quarters ago, it now appears we have hit the bottom of the market in terms of vacancy and that is critical here in this business,” said Andrew Florance, CEO of CoStar. “The fact that we are clearly showing some sort of bottom and we don’t have a significant increase in vacancy this quarter is very positive news.”

In presenting the latest findings based on CoStar’s research, Florance sought to dispel confusion over the office market’s performance that may have resulted from conflicting media reports.

[BLOGGER COMMENT: In an earlier post this blogger noted the fact that Florida office assets are now trading for substantially below replacement cost. My conclusion is that this appears to be an outstanding entry point for investors that have been on the sidelines waiting for a buy signal.]

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Tampa Bay Sale TrAs the price

[BLOGGER QUESTION]

Is it time to call a buying signal for office properties in Florida now that the acquisition price has dipped under the replacement cost? Or are office investors trying to catch a falling knife?

With Little Quality Office Product in Play, Investors Vying Sharply for Low Hanging Fruit

By Mark Heschmeyer

Last year, capitalization rates on large office property sales rocketed from the mid-6 range to the mid-8 range. So far this year, cap rates have reversed course, falling back just as rapidly to mid-7 range. Under ‘normal’ conditions, this would imply that property values are increasing. So why isn’t the commercial real estate industry elated?

Cap rates are a benchmark determined by dividing income by property value. Increasing cap rates typically imply that property values are falling. Last year, no one in commercial real estate doubted that the rapid rise in cap rates reflected an equal rapid decline in property values.

[BLOGGER COMMENT: This is a bifurcated market. Class D&F assets are being sold at a dramatic discounts to replacement cost for cash since no financing is available for low quality assets. Class A&AA assets are receiving 20-30 bids when those assets come to market from investors that have raised trillions of equity capital and need to place it before their investors start asking for their money back. The trend toward low cap rates in investment grade assets will continue as the 10 year Treasury stays at such low levels (3.48% as of this writing) and positive leverage can be achieved.  I predict the return of transactions for Class B&C assets will only happen once CMBS 2.0 hits high gear in Q3 or Q4 of 2010.]

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