Realty Check

Why Investors Are Suddenly Bullish on Office Real Estate

It should come as no surprise that the commercial real estate sector most sensitive to unemployment is office; that’s where people work. 

Slow job growth has helped a little, but really only in the trophy, coastal markets, so it may come as a surprise that investors are suddenly bullish on the sector.

Don’t look to the numbers quite yet for any signs of hope. They deteriorated a bit in the second quarter of this year, according to a new report from Reis, Inc.

Office vacancies nationally are still at a high 17.2 percent and we saw just 4.1 million square feet of net absorption, down from 6 million in the first quarter of the year. Asking and effective rents are up just 0.3 percent, again not as strong as the gains in Q1.

But confidence in the sector is rebounding, according to a new report from PwC. Confidence is strongest in Southeast Florida and Phoenix, thanks to recovering employment.

“We're finding markets that were overlooked for quite a while, like Denver, like South Florida as being where  investors are seeing opportunities from an investment perspective, largely because we haven't seen additions in inventory in those markets in the last 5, 6, 7 years perhaps,” notes PwC’s Mitch Roschelle. “As demand comes back for office space we're going to see rents going up in those markets.”

The trophy markets, like New York, San Francisco and Washington, DC may not be the best bets, as they’re already pricey and vacancies there are the tightest in the nation, but PwC is finding big trading volume in properties in Austin, TX, Raleigh-Durham, NC, the Pacific Northwest and northern New Jersey.

“This is where investors are running looking for opportunities and hopefully getting there first because it is a bit of a horse race,” says Roschelle.

The office recovery will be slow, as unfortunately a substantial portion of the jobs being created are not in the office-using sectors, according to Reis. 

“Organizations have become much more cautious in their outlook and hiring in recent months due to the heightened uncertainty looming over the economy,” analysts at Reis note.  But Roschelle claims the slow growth in the economy is already “baked into the numbers as it relates to the models that prospective investors are using to forecast what the future looks like.” 

He’s certainly not expecting a boom, but given the short supply of space and the fact that it takes a few years to build a building, the prospects for growth appear to be improving.

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