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What Makes Office a Strong Investment Today?
As many companies continue work-from-home policies, how can you determine if an office asset is worth the investment?
Even though hotels and retail assets have undoubtedly taken the hardest hits since the beginning of the pandemic, doubt continues to swirl around the viability of office real estate investment today. A fourth-quarter report from JLL indicates the sector may be turning the corner, however, with office leasing activity picking up and vacancy beginning to rebound.
Even so, with so many companies retaining flexible, work-from-home policies—something unlikely to substantially shift as new coronavirus variants continue to spread—does the traditional office space even have much of a place in the future?
In a nutshell, yes. Office properties will remain a critical element of the working world, even if tomorrow’s office space may look and feel completely at odds with the sector just a couple years prior.
So, how can you tell if that office building you’re eyeing is a good investment for the future? Although there are myriad factors to weigh, we have highlighted a few key considerations below.
Flexible Layouts
Although office properties with large floor plates are in high demand, far more important is how flexible the space is. For example, how effectively can a tenant’s employees socially distance? Are the walls movable? How well can the space be adapted for different tenants with different needs? While flexibility is a critical factor right now, the ability to adapt your property to tomorrow’s profile is essential, even absent the pandemic.
Updated Building Systems
While it’s unlikely that a relatively small, 20-year-old office building would have bleeding-edge technology installed, assessing a property’s systems is a critical component in understanding the true cost of an office acquisition. For example, can the asset’s HVAC system be outfitted with HEPA filters? In the case of a multi-tenant property, do all employees share the same entrance? Are there bottlenecks that could be solved with a keyless entry system?
Tenant Roster
What does the property’s existing roster look like? What is the average lease term remaining for your largest tenants? A little homework on tenants’ remote-work policies could even highlight future challenges or opportunities, particularly if a renewal is on the horizon. Understanding how your property’s available space compares to the market’s office vacancy could signal additional strengths and weaknesses hidden beneath the surface.
Location, Location, Location
While an office property’s physical address can play a major role in its success, things are changing in some markets. Prior to the pandemic, office assets in central business districts typically were among the strongest commercial real estate investments, though demand has risen in many suburban zones. Comprehensively understanding your target office market—not just the asset’s location within that market—should play a critical role in your investment strategy.
Related Questions
What are the benefits of investing in office real estate today?
Investing in office real estate today has many benefits. Firstly, flexible layouts are important for tenants to be able to socially distance and adapt the space to their needs. Secondly, location is still a major factor in the success of an office property, though demand has risen in many suburban zones. Lastly, understanding the target office market is essential for a successful investment strategy.
What are the risks associated with investing in office real estate?
Investing in office real estate can be a great way to generate income, but there are some risks associated with it. The primary risk is that the property may not generate enough income to cover the costs of ownership. This could be due to a variety of factors, such as the location of the property, the quality of the building, or the availability of tenants. Additionally, there is always the risk of market fluctuations, which could affect the value of the property.
It is important to do your research and understand the risks associated with investing in office real estate before making any decisions. Make sure to consider the location, quality of the building, and potential tenants, as well as the potential for market fluctuations. Additionally, it is important to understand the terms of any loan products you may be considering, such as interest rates, repayment terms, and any fees associated with the loan.
What are the current trends in office real estate investments?
The office sector has taken a major hit from pandemic-driven work-from-home policies, and while some employees have returned to their traditional workspaces, many have embraced the remote work lifestyle, leaving countless offices empty. As a result, several companies have reduced their office space, renegotiated rents, or relocated to higher-quality buildings to make their workplaces more desirable to employees. Vacancy has skyrocketed during the health crisis, and recovery has been slow ever since. According to Newmark research, the nation recorded 12.8 million square feet of negative net absorption in the second quarter of the year.
The remote work culture is here to stay, and companies continue to adjust space requirements, and the flight-to-quality phenomenon will remain the number one driver for space. According to Newmark, a shrinking construction pipeline might help mitigate vacancy issues; however, supply will most likely outpace demand in the coming year in most major markets.
When it’s time for a tenant to renew or negotiate that office lease, they are likely to keep or shrink their space. In a recent Cushman & Wakefield podcast episode, author and entrepreneur Julia Hobsbawm comments that, “Fundamentally, no, we are not going to see workplaces with any agency at all working five days a week from the same place ever again.” Host Michael Creamer notes that this shift away from the office could be more long-term simply because of the long-term nature of the pandemic’s effects.
An Axios report from late March points to how lenders are viewing these shifts. Analysts at global financial institution Barclays indicated that the share of office loans being placed on watch lists or sent to special servicers has hit highs not seen since the global financial crisis nearly 15 years ago.
Axios concludes that the office real estate market is relatively safe — at least for now. But as the shift to working from home appears to have taken hold, the resulting decrease in demand for physical office space could have significant ramifications further down the road.
What are the best strategies for investing in office real estate?
The best strategies for investing in office real estate depend on your goals for the property. It's important to have a clear investment strategy in place before taking out an office loan. Consider the building's current condition, whether capital improvements are needed, and what type of loan terms would best serve your needs. Additionally, be patient and take the time to comprehensively review everything before making an investment decision.
What are the most important factors to consider when investing in office real estate?
The most important factors to consider when investing in office real estate are location, cost, and the features of the property. Location is important because it should be accessible for employees, customers, and clients, and should be in a safe area. Additionally, services near the office asset, such as restaurants, shops, and services like gyms or dry cleaners, can be a selling point. Cost is also important, as you should consider the costs of any improvements necessary to make the property useful to potential tenants. Finally, you should consider the features of the property, and make sure you are not paying more for something you or your tenants may not have any use for.
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