If you’re a real estate investor looking to increase your returns, you might want to consider investing in office space. Commercial office spaces make up almost 20% of the commercial real estate market and offer higher returns than other types of commercial properties.
And although office investment properties also present higher risks to the investor, some commercial real estate investors are choosing to risk the high volatility of the market in exchange for definite benefits offered by up and coming property types such as medical offices.
What Is The Definition Of “Office Property?”
Office buildings are classified as either Class A, Class B, or Class C investment properties. In order to determine which class a building belongs to, several factors are evaluated, and although they are relatively subjective and can change over time, all are considered useful indicators of an individual property’s ability to attract tenants.
Some of the characteristics of a property that are considered when determining the class a building belongs to are: location, building finishes, building height (high-rise vs low-rise), market presence, rent, market presence, the nature of the tenancy, and the condition of the property.
- Class A consists of exceptional properties with state-of-the-art systems, rents which are higher than the area’s average and possess a definite market presence. Tenants are able to pay for the higher rent demanded in exchange for exceptional building quality and amenities.
- Class B properties are generally older, with a less central location. They offer average to above average facilities in terms of building finishes, amenities, and systems. Tenants who choose Class B properties are stable, and often upgrade to Class A properties during economic down times.
- Class C properties attract tenants based on lower price. Because the space is functional and not specialized, it appeals to a wide variety of tenants interested in leasing commercial space.
However, within each class, the nature and function of each property can vary, from general function offices to specialized properties such as medical offices.
Commercial Office Space – Higher Returns At The Cost Of Greater Risk
Office buildings are notorious for their volatility. The amount and type of office investment properties are intimately related to the growth of a business, which is in turn dependent upon the growth of jobs in its sector.
In addition, both the business type and location of the office will naturally experience fluctuations that affect profitability over the short and long term. So while trophy locations like Manhattan, Washington D.C., and Boston will always be in high demand, other areas may face high vacancy rates despite the presence of Class A assets.
Trends That Affect Office Space Demand
As noted before, particular industries may experience their own ups and downs that influence demand for office investment space.
- Technology. Online giants such as Amazon replacing local stores and shopping malls is one well-known example of how changes in technology can affect businesses. There are less obvious, but equally impactful, changes in tools and technology that can either supplement or completely replace office workers.
Studies show in addition to off-shoring, the rise of virtual workers, and the increase of job sharing, office sharing, and other creative approaches to what was once standard 9-5 jobs have significantly affected the amount of office space needed by businesses.
- Changes in business practices or production methods. Businesses are embracing alternative methods of delivering goods and services. For example, grocery stores that offer complete self-service aisles eliminate the need for cashiers and baggers on those lines, allowing them to reduce staff and increase customer satisfaction.
- Outsourcing. The increasing growth of the global economy has encouraged businesses to outsource full and part-time jobs instead of hiring staff. When that happens, the amount of job hires for that industry decrease.
- Products or services becoming obsolete. Industry demand can also be affected by the waning in popularity of particular products or services.
Postal services, for example, are expected to lose more than 165,000 jobs within the next few years. Newspaper and periodical manufacturers are also expected to be hit heavily, with anticipated loss of 103,000 jobs over the next eight years. The decreasing popularity of wallpaper is another example: painters are predicted to gain the industry share lost by wallpaper hangers.
Best Industries To Invest In
Since vacancy rate and demand of office space is tied to economic upturns and downturns, it makes sense to take a look at which industries are predicted to experience job growth in the next several quarters of 2016.
The most obvious industries at the forefront are medical related. In fact, out of the top 11 industries expected to experience significant growth over the next eight years, six of them are health-related.
In fact, experts predict that due to the Obama Care Law and other health care reforms, this is an area that investors would do well to pay attention to.