Watch Out For These Pitfalls When Investing In Office Buildings

Jun 14, 2016

Office buildings are one of the most volatile asset classes of all commercial properties.

Office buildings are closely tied to job growth, and specifically, white-collar jobs. That’s why when checking out the location of a property, you also need to take into consideration the number of jobs that are being added to the area.

In order to get this information you can check the Bureau of Labor, but it’s also a good idea to go to the local Chamber of Commerce, which has a business development division, which will have all of the job data and economic statistics you need.

The success of your office property is also tied to the growth of the economy.

As the economy grows, companies grow more confident, and so they hire more workers and require a larger space to accommodate new employees. If the economy goes down, companies fire more full-time employees and downsize in terms of office space.

Before you consider purchasing an office property, it’s critical that you be aware of what side of the real estate cycle you are presently in.

1. Supply And Demand Can Vary Dramatically In Office Buildings

in office buildings supply and demand varyIt’s important to check the demand of the office type you are considering investing in. If you’re thinking of buying a high-tech space, is there a demand for that type of property in the area? You’ll also want to check what the supply is like in that area – are there too many? Or are there too few?

Supply and demand can be broken down into three components. The first is the vacancy rate, which refers to the number of empty units available in the area. The second is the absorption rate, which tells you how long it takes for available space to be leased. The third is local market supply, which refers to knowing the price per square foot and the services offered for comparable properties in the area.

Gathering this data will help you decide if there actually is demand for that property type in your area.

If you know that there is demand for that office type in your area, but that the property you’re considering has a high vacancy rate and the area’s absorption rate is low, then you know you’ll need to set aside enough money to ensure you can make it through a low cash flow period. If you don’t, you could end up with a property that has great profit potential – but lacks the funds to see it through the initial buy period.

2. Beware Of Tenants Who Rent A Majority Of Office Space

It may seem like a windfall when one tenant decides to rent a large percentage of your available office space. After all, it saves you from having to filling up vacant space and makes tenant management easier.

However, if the company decides not to renew the lease, or moves out before the lease finishes, you could be left with a huge hole in your cash flow. Plus, you’ll also have a large amount of square footage that needs to be renovated for the next tenant, which can be prohibitive.

In order to avoid these negatives, make sure you have a significant sum of money put aside to cover for these contingencies.

3. Expiring Leases

in office buildings watch out for expiring leasesDepending on the size of your office building, a number of leases that expire at the same time can be devastating to your cash flow.

Try to stagger the year, or at the very least the month, that your tenants’ leases expire.

4. Obsolescence

This can occur even if the office building is a B class building. For example, if the location of the property shifts to include a different demographic, your office building may no longer be able to support the needs of the new tenants.

This might occur if an area switches to high-tech, but upgrading your commercial property so that it can handle the high electrical requirements of high-tech tenants would be prohibitive.

Office buildings are high-risk investments that, for the right investor, can be quite rewarding. If you’re interested in purchasing an office property that has already been vetted by an experienced commercial real estate broker, then contact.

Looking To Buy Commercial Property?

Find out why triple-net lease real estate investments should be part of your investment portfolio.