Opportunities with Office Space Going Forward
February 2022
Owning office properties in a post-COVID working environment is profitable when the right factors align
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With the combined movement toward working remotely pre-COVID compounded by the work-from-home mandates during the pandemic, some markets in office real estate have seen negative absorption for the last few years. A few of those negative absorption figures are even understated since large companies that own their own vast office buildings do not report vacant office space. With many companies looking for solutions to their mismatch between shrinking headcount and fixed office space, can office real estate still produce out-sized returns for investors?
Stabilized vs Opportunistic
In the midst of this systemic change to the office market, some pockets of investing groups have purchased office space opportunistically, coupling expectations of higher returns with, at times, higher risk. For example, purchased with lower occupancy but for a reasonable price, these investments can enjoy significant upside with similar risk as their more replete counterparts. Some of these lower occupancy opportunities may achieve even lower risk by getting tenants to sign a letter of intent/lease even before the building is purchased.
If events go sideways, however, these opportunities could tilt the other way: lower occupancy properties may not absorb tenants as projected, non-traditional location investments may resist the intended growth in the non-traditional area, or value-add office opportunistic choices may fail to reach the amenities demanded during a stronger than expected migrative "flight to quality".
However, stabilized A class office buildings in many markets have resisted losses via high occupancy and competitive rental rates. Purchasing a stabilized, high occupancy building comes with its own risks of tenant loss while being stuck with a high fixed loan payment. Withal, at times, stabilized properties are stabilized for a reason, whether it be location, quality, price, etc., and can offer a good return/risk profile.
The Salt Lake City County metro area, for example, not only saw positive absorption for the year end but also increased rates, particularly for Class A properties, according to Newmark's 4Q21 report.