Office Looking Up!
The most popular commercial real estate class, the U.S. office market has traditionally attracted large amounts of capital from both institutional and private investors. Office remains an attractive real estate class because of its diverse base of end-users that span a variety of industries and businesses.
Traditional office buildings have been the norm for decades. A new, growing segment of today’s office market focuses on “creative” space – first gaining a foothold in the 1980s as older warehouse buildings were repurposed as trendy office space (lofts) with original brick walls, floors and open ceilings that showed exposed beams and ductwork. The distinction of traditional vs. creative space is intertwined with today’s ongoing demographic changes.
What drives demand for office properties?
- Employment: The single largest driver of demand, the Office sector thrives when the economy is growing, and companies are expanding. Likewise, the office market struggles during periods of flat or declining job growth.
- OFFICE SPACE USERS: A wide variety of companies and industries still occupy traditional office space. Those users have vastly different criteria and motivations when choosing space to fit their needs. For some, it is finding the best location close to customers and employees. Other companies are highly sensitive to cost and their budget. Others still may prioritize privacy and seek isolated locations with secured access. User requirements may include other considerations, such as:
- Building services,
- Amenities,
- Adequate parking,
- State-of-the art technology
- Building infrastructure
- Impact of the location on a company’s brand identity and image.
The key point is that office buildings come in all shapes and sizes. This creates demand for different types of properties and thus different investment opportunities.
- GENERATIONAL FACTORS: While some factors such as job growth are difficult to project, demographics are absolute facts. Millennials provide an interesting case study, since they will soon represent the largest segment of the workforce. Their preferences are influencing both office location and design decisions. Hence, ideal offices look more like living rooms rather than the cube farms of years gone by – along with on site or nearby amenities, including bike parking, locker rooms and coffee bars, as well as other factors such as “green” or energy efficient buildings.
While new technologies have pundits predicting the demise of physical office space, a more pragmatic view suggests that the way office space is used is changing, but still in demand.
- Working from home or the local coffee shop is not effective for every individual or every business; rather, the vast majority of workers need and desire going to an office to do work, collaborate with colleagues, and meet with clients. Demand for office space is not disappearing but evolving.
- When considering such evolution, note the factors that affect where companies locate their offices. In past years, companies took a car centric approach to office requirements, seeking suburban business parks with large parking ratios and onsite amenities like cafeterias. Now, companies increasingly want to be located in vibrant communities surrounded by compelling offsite amenities.
- Likewise, urbanization is influencing location decisions. But urban hubs are not just confined to traditional downtowns; they’re popping up in traditional suburban settings as cities adapt to changing societal demands.
- In either urban or suburban locations, the common denominator when selecting an office space is that it helps companies attract and retain talent.
- Remember too that certain trends have staying power, while others will be short lived.
No matter the type or location of any office building, it must maintain its relevancy over the course of the holding period. Understanding classifications, market subtypes, demographics and office uses are intended to equip you with important knowledge.