Defining the end user premium in vacancy sales

End users buying commercial property is certainly not a new phenomenon. In today’s market they account for some of the most significant U.S. office and retail sales and in many cases, they are paying premiums far beyond investor valuations for vacant or mostly vacant property. 

Recent examples of this are widespread. In New York, Gucci and Prada first come to mind having bought prime Fifth Avenue retail properties for $963 and $822 million respectively. Amazon most recently purchased 522 Fifth Avenue for $456 million to expand their offices.

This is not just a New York City phenomenon. In the San Francisco and the Bay Area, the top 1H25 office sales were by end users. PG&E paid $906 million for their office in Oakland, while Apple stepped up and bought their leased building in San Jose for $350 million.

What did these office sales have in common? They were all north of $900 per square foot (psf), well above the average in those markets. In Denver, Bet 365 took down the top office sale for $135 million, which was also highest at over $500 psf.

It is true that these sales premiums could be a result of buying the best office product. It could also represent the premium they are willing to pay to establish a permanent presence without facing the uncertainly of a costly lease renewal, or worse losing the space in the future. End users also don’t have to solve for a specific yield or timeline like an investor; it is more about the utility and comparative cost to lease.

So how much is this premium? When I started in the business over 25 years ago, we witnessed this trend time and time again. It was a bit subjective as we saw users paying anywhere from 10-100% premiums depending on the portion of the property they were occupying, as well as condition and location among other factors.

We recently looked at all vacant retail spaces that we sold to end users. We compared the sales price to the next highest investor bid. In this case, the premium was 28%. In the case of a recent DMV office valuation, we compared the comparable investor sales to end user sales. Here the premium was 22%.

Thus, when an owner is struggling to lease or sell a property with vacancy, a broad marketing campaign which targets end users is vital to achieve the highest possible price. Key to a successful transaction, it’s paramount to fully cooperate and incentivize the brokerage community, especially the tenant representatives.

Sellers will benefit from this process, but so will would-be-tenants turned owners. With the financing, tax benefits, and appreciation potential for ownerships, the case can be made on why owing in some cases makes more sense than leasing. A definite win-win when the right match can be made.

James Nelson

• • Principal, Head of U.S. Investment Sales
• • Capital Markets Group
  • Investment Sales

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