Investing in Office Real Estate

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Contributor, Benzinga
July 16, 2021

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Much commercial real estate is used for office space. With tenant demands and needs distinct, building owners are leasing office real estate to a wide variety of clients. Investors in this market are looking for transactions that make the most sense for companies and their employees while keeping in mind the number of companies still offering remote work. 

Types of Office Buildings

Office classes

  • Class A office buildings are highly sought after by big companies expecting the best of everything and willing to pay above-average rents. Top-quality amenities, fixtures and efficient systems as well as high-end finishes and market presence are a must. Impressive architecture and design also are expected in these properties. Generally, these types of offices are located in high-rise buildings in the busy central business districts.
  • Class B office space is adequate space used for a wide range of businesses. The buildings are decent, but much more average. Fair rents and competitive leases are the norm here. Class B buildings have less impressive finishes and systems than Class A buildings, but the office space is sufficient for a client’s needs. These office buildings are usually found to be older and located in suburbs or on the outskirts of financial districts.
  • Class C buildings are more for the bare bones of functional office space. They’re nothing impressive, but they offer space at below-average lease rates. The condition of these office spaces is generally in need of repair or renovation, are small in size and are located in less desirable areas off the beaten path. 

Office Tenants

Office real estate typically provides office space with single-tenant or multitenant options. A large company may need an entire building while another tenant may want to locate in a property that has multiple companies leasing suites or occupying entire floors. A commercial building used as office space may house a variety of different types of companies, including:

  • Dental and medical offices
  • Banks and financial services businesses
  • Law firms
  • Advertising agencies
  • Technology research companies
  • Corporate headquarters
  • Insurance 

Office Leases

  • A full-service or gross lease is where the tenant pays the same amount each month while the building owner pays for taxes, maintenance and insurance. The landlord in this situation also pays any bills such as utilities. In this type of lease, the tenant generally pays a higher rent to compensate for how much the landlord takes care of.
  • In a net lease, the tenant also pays a fixed price each month for rent, while also paying its share of the property taxes and utilities. The base lease rate may be less than with a gross lease, but the recurring bills are subject to change.
  • A triple net lease is a lease where the tenant pays a base rent each month plus its portion of the property insurance, taxes and utilities. Under this type of lease, the tenant also pays for common area maintenance. 

Office Real Estate Market Outlook

After the major downturn of the office market as a result of COVID-19, projections are finally looking up. The economy is slowly recovering as more businesses open to full capacity and can offer more in-person jobs. While the need for office space can be cut by about 15% as a result of remote work, many companies are trying to gradually get their employees back into the office. Easy access to the vaccine as well as building upgrades, such as touchless technology and improved indoor air quality, will help stabilize the office market in the coming year. 

Pros and Cons of Investing in Office Buildings

PROS: Flexible space options are becoming a demand for the future. Many companies are planning to offer a hybrid start for their employees, getting everyone more comfortable heading back into the office. So, the overall quality of the workspace will be a major decision in leasing. Investing now should pay off down the line as long as you know what companies will be looking for. Secondary markets in suburban areas are projected to bounce back faster as well. Demand in these areas is already on the rise. Highly populated cities dependent on mass transportation will be among the slowest to recover. 

CONS: Extended vacancy and uncertainty definitely make investing questionable. While there are some optimistic recovery projections, the fact is that things have changed. Many companies are simply not making leasing decisions just yet, while their employees are comfortably able to work remotely.

Ways to Invest in Office Buildings

  • Purchase commercial real estate: Some decline in the purchase of commercial real estate after last year’s pandemic has occurred, leading investors to be more open to purchasing now — if they can get a property at the right price. As projections for 2022 begin to look more promising, it’s a good idea to look into purchasing now and having the building ready — with some flexible space options — for the return of businesses.
  • Office REITs: Real estate investment trusts (REITs) own and manage office real estate they lease to businesses. Investors can buy REIT shares — taking on much less risk than actually purchasing real estate. Tax benefits and guaranteed dividends are also pros to investing in office REITs.  
  • Crowdfunding: With crowdfunding, you can invest in a business without being an accredited investor. This makes it possible for many people to begin investing. Exploring investment opportunities that are out there and taking some chances will ultimately help you grow your portfolio. 
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As you navigate these uncertain times, remember the possibilities are endless if you’ve done enough research. There’s always a great investment opportunity right under your nose, and right now it could be in the office real estate market. 

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