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.
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?
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.