The American office market has traditionally attracted large volumes of investment capital from institutional and private investors. The industry generally records over $100 billion in institutional-quality transactions every year. The National Council of Real Estate Investment Fiduciaries (NCREIF) Index puts the average annual performance of office buildings over the past 20 years at 10.3 percent. This chapter provides an overview of the asset class for office buildings and highlights the major drivers of demand including the role of demography and concludes on how investors can apply this information to make more intelligent investment decisions.
The US office marketplace has traditionally attracted significant investment capital from institutional and private investors. This sector typically records well over $100 billion in corporate-grade transactions every year.
An office is a category of real estate assets that shareware appealing for several reasons. It has strong underlying fundamentals, a diversified end-user base covering a variety of industries, and long experience in producing strong returns. This includes the National Council of Real Estate Investment Fiduciaries. The index tells us that the average annual return for all office buildings (including income and capital gains) over the last 20 years is 10.3 percent. Additionally, the office investment industry provides a range of opportunities in the various core, core plus, value-added, and opportunistic investment strategies – each of which has intrinsically different risk-adjusted return scenarios starting with single-digit annualized returns the conservative ending at more than 20 percent annualized Returns on opportunistic deals. In this chapter, we will start with a brief overview of the office asset class, highlighting the major drivers of demand, including the role of demographic data, and conclude with a discussion of evolving uses and how investors can use this information when making investment decisions.
Asset Class Overview
Office buildings are generally defined as having 75% or more of the interior space of a building designed and finished as an office space. Office buildings are generally divided into two categories depending on location: central business district (CBD) or suburban. The industry story also "classifies" class A, B, or C properties according to criteria such as age, quality, amenities, rent, and location, among others.
CBD vs. Suburban
Across the United States, office markets are typically divided into two subsets a) CBD - the "Central Business District", is the heart of most office markets and usually has the greatest concentration of office space, and b) Suburban - the sparsely populated areas outside the urban center. Some of the differences that should be considered when comparing urban and suburban properties are parking and public transportation. Urban properties are more dependent on access to public transit, while suburban properties demand higher parking ratios.
Traditional vs. Creative
Conventional office buildings have been the norm in the office environment for decades. There is a new and growing segment of the desktop marketplace that focuses on the "creative" space. This area began to gain ground back in the 1980s as the old warehouse buildings were converted into "fashionable" office spaces with an interior design that showcases the original brick walls, open floors, and ceilings that featured exposed beams and sheaths.
This was a favorite among creative ensembles such as advertising agencies and start-ups of new technologies. The distinction between traditional space and creative space is closely linked to demographics that are driving changes in office usage, a topic we discuss in more detail below. It is useful for office investors to understand the demand drivers that affect occupancy rate growth and new builds. The biggest application factor is the office.
Employment is an industry. Traditionally, the growth of jobs is strongly correlated and positively absorbs office space. The office sector typically prospers when the economy is growing, and businesses are expanding as businesses look for more space to welcome new workers. Similarly, the office market is experiencing difficulties at a time when employment growth is stagnating or declining. Services to companies and professionals, such as finance, insurance, and real estate users as well as the use of information technology. These types of users have an appetite for desktop space that can change quickly based on the success or demise of their business models.
There is a wide variety of firms and industries with office space, and these users have very different criteria for selecting the space to rent that best suits their needs. For some users, it's about finding the best location within easy reach of customers and employees. Other businesses are very cost sensitive and need to budget. Others can still give priority to privacy and look for remote locations with secure access. User requirements may also include any number of other considerations, including construction services and equipment, proper parking, high-tech, building infrastructure, and site impact on the company's identity and corporate identity.
The important thing is that office building has all kinds of shapes and sizes. This creates a need for different types of properties and therefore different investment opportunities.
Although certain demand drivers, such as employment growth, are difficult to predict, demographics are an absolute fact. Investigating how demography affects office demand may allow investors to draw asset-based conclusions. The millennial generation is an interesting case study in that respect. This demographic will soon be the most important part of the workforce. Not surprisingly, their preferences influence decisions about office locations, resulting in landlords struggling to better understand their location. As a result, modern offices are starting to look more like trade fairs rather than the cubical farms of past decades.
In addition to a millennial "fresh environment" desire a host of facilities on-site or nearby, including bicycle parking, cloakrooms, and cafes, as well as other factors such as "green" or energy-efficient buildings. Increasingly, companies are using this model to find places rich in amenities to compete with this booming generation of talent
Changes in Office Use
With a basic understanding of how demographics consider changes in office design and use, it's easier to look at other work strategies that change the way people choose to work and where they choose to work. While the massive uptake of mobile technologies has some experts calling for the end of office space as we know it, a more pragmatic perspective suggests that the way office space is used changes but is always in demand.
Working from home or at a local coffee shop is not effective for each person or company, as most workers still need and want to travel to a part-time or full-time office to do work, collaborate with co-workers, and meet with customers. This means that the demand for office space does not disappear but evolves. When looking at this evolution, it is important to first consider the factors that influence where companies choose to set up their offices. In the past, businesses have adopted a car-centered approach to office requirements, this has resulted in a demand for suburban business parks with high rates of parking and onsite amenities like cafeterias.
Now, businesses increasingly want to be in dynamic communities with attractive off-site amenities, as businesses seek to answer the question of dynamism, urban trends influence location decisions. A growing body of research supports the argument that urban centers are a magnet for business and residential development.
These urban hubs often have a density of different types of real estate use, including offices, residences, retailers, restaurants, and entertainment. They are very accessible on foot and are connected to public transport such as high-speed buses, the metro, or light rail. All these aspects provide a convincing argument to explain why a business should choose it for its office location. But perhaps surprisingly, these urban centers are not just confined to traditional town centers, they also appear in traditional suburbs as cities adjust to changing societal requirements. Whether it's an urban or suburban location, the common thread when choosing an office space is that it helps businesses attract and retain talent. Changes in usage also reflect the fact that some trends are sustainable, while others may be of short duration.