Top 7 Office Investment Considerations
While there are many facets to a successful office investment strategy, don’t forget about these seven critical components.
Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get QuotesAre you in the market to buy an office property? Whether you are an investor entering the office sector or a business owner seeking to acquire space for your workforce, some caution is warranted: There are many potential pitfalls when choosing an asset. If you aren’t cautious, you could end up getting something that simply won’t work well for your needs.
We have listed seven key considerations for an office investment to help cut through the noise.
Cost
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The primary concern when buying an office property is cost — even if you can afford the price and mortgage payments, do the costs pencil, considering the building’s quality and features? While a low price may look attractive to buyers with limited capital, consider the costs of any improvements necessary to make the property useful to potential tenants. A cheaper building may, in the long run, cost far more than a larger initial investment in a higher-class asset.
At the same time, it may not be the best idea to splurge on the property that has the most features. There’s little sense in paying more money for something you or your tenants may not have any use for. Does it make sense to pay more for an office building with a slightly dated fitness center, or less for a property located near a retail center with a state-of-the-art gym? Consider your actual needs carefully.
Once you have determined what you need from the property, you can then begin the search. Keep in mind that you may not always be able to find the “perfect” investment opportunity. However, identifying your needs is crucial to select the building that most closely fits your needs in the context of your budget.
Location
Where your office property is located is extremely important. At a minimum, a property should ideally be accessible without any major issues for employees, customers, and clients. Beyond this, you should consider the security of the surrounding area. If a property is in an unsafe area, you may want to think twice — even if a building is well maintained, has some nice features, and is within your price range. After all, if it’s not in a good area, this could affect future valuation, not to mention leave a poor first impression on customers.
Additionally, you should consider the services near the office asset. Though it may not have a direct impact on a tenant’s business, a location near restaurants, shops, and services like gyms or dry cleaners could be a selling point.
Size, Layout
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The size of a property is another important thing to keep in mind when choosing a space. If you will not be occupying the building, step into a potential tenant’s shoes: Is the space large enough — and flexible enough — to accommodate one or multiple tenants’ employees and equipment? If the space is for your company, is there room to expand? In the meantime, could unoccupied space be separated and leased to other tenants?
Also, consider the layout — not just the quantity — of the space. Do floor plans allow for an open office setup, or are walled offices already configured? Making changes to the setup can take significant resources, both time and money, so ensure you have a clear eye on what potential reconfiguration work is needed.
Existing Leases
If you are investing in an office asset, your main cash flow will be from leases. Unless you’re buying a development underway, it’s more than likely your building will have one or more long-term office leases already in place. When reviewing a property, ask for a list of existing leases and the term remaining on each. While a 100% occupied building may look great on paper, it could spell trouble if half of the tenants are planning to relocate in the next year. Additionally, consider the types of tenants the property already has in place.
Infrastructure
Even if a central location isn’t necessary for your office space, it’s important to get a feel for the infrastructure in place at a building, particularly in more remote, suburban settings. Is high-speed internet available? How reliable are snow removal services in the area?
Parking
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Having enough parking spaces is a critical factor for an office building — particularly for those properties in suburban zones. If most of a tenant’s employees will commute by car, ensure this is reflected in your ideal parking ratio. Also allow additional spaces for visiting clients. While this factor may be less important for assets in a downtown location, it should still be on your radar.
Be Patient
Although you may wish to make an office investment decision sooner rather than later, you don’t want to rush. Make sure you have the time to comprehensively review everything — should you fail to consider some aspects of the space, its future tenants, or your investment criteria, it could mean future trouble down the road.
Related Questions
What are the most important factors to consider when investing in office real estate?
When investing in office real estate, the most important factors to consider are location, cost, and the building's features. Location is important because it should be accessible for employees, customers, and clients, and should be in a safe area. Additionally, services near the office asset, such as restaurants, shops, and gyms, can be a selling point. Cost is also important, as you should consider the costs of any improvements necessary to make the property useful to potential tenants. Finally, you should consider the building's features and determine what you need from the property. Source
What are the benefits of investing in office real estate?
Investing in office real estate can offer a variety of tax benefits, such as accelerated depreciation, mortgage interest deductions, and tax advantages for an investor’s heirs. Additionally, office properties with flexible layouts are in high demand, as they can be adapted to different tenants with different needs. This flexibility is especially important during the pandemic, as it allows for social distancing and other safety measures.
What are the risks associated with investing in office real estate?
Investing in office real estate can be a great way to generate income, but there are some risks associated with it. The primary risk is that the property may not generate enough income to cover the costs of ownership. This could be due to a variety of factors, such as the location of the property, the quality of the building, or the availability of tenants. Additionally, there is always the risk of market fluctuations, which could affect the value of the property.
It is important to do your research and understand the risks associated with investing in office real estate before making any decisions. Make sure to consider the location of the property, the quality of the building, the availability of tenants, and the potential for market fluctuations. Additionally, it is important to understand the terms of any loan products you may be considering, such as the interest rate, repayment terms, and any fees associated with the loan.
What are the best strategies for investing in office real estate?
The best strategies for investing in office real estate depend on your goals for the property. It's important to have a clear investment strategy in place before taking out an office loan. Consider the building's current condition, whether capital improvements are needed, and what type of loan terms would best serve your needs. Additionally, be patient and take the time to comprehensively review everything before making an investment decision.
What are the tax implications of investing in office real estate?
Investing in office real estate can have a variety of tax implications, depending on the type of investment and the structure of the investment. Generally, office real estate investments are subject to income taxes, capital gains taxes, and depreciation recapture taxes. Income taxes are paid on rental income, capital gains taxes are paid on the sale of the property, and depreciation recapture taxes are paid on the difference between the sale price and the depreciated value of the property.
It is important to work with a qualified tax professional to understand the specific tax implications of investing in office real estate. A tax professional can help you understand the tax implications of different types of investments, as well as the best strategies for reducing your tax burden. They can also help you understand the changes to the tax code for 2022 and beyond.
What are the current trends in office real estate investment?
The office sector has taken a major hit from pandemic-driven work-from-home policies, and while some employees have returned to their traditional workspaces, many have embraced the remote work lifestyle, leaving countless offices empty. As a result, several companies have reduced their office space, renegotiated rents, or relocated to higher-quality buildings to make their workplaces more desirable to employees. Vacancy has skyrocketed during the health crisis, and recovery has been slow ever since. With the remote work culture here to stay, companies continue to adjust space requirements, and the flight-to-quality phenomenon will remain the number one driver for space.
When it’s time for a tenant to renew or negotiate that office lease, they will likely keep or shrink their space. People still need to feel connected to each other at work, though often to differing degrees, and the office will likely not be the venue for much of this going forward, with more and more workers looking to replace water-cooler conversations with meet ups at cafés, or even increased business travel events like conferences and conventions.
An Axios report from late March points to how lenders are viewing these shifts. Analysts at global financial institution Barclays indicated that the share of office loans being placed on watch lists or sent to special servicers has hit highs not seen since the global financial crisis nearly 15 years ago.
Of course, it’s entirely possible that companies begin shifting back to the office. Last year, a number of companies — including some major law firms — inked huge new office leases, with more in the pipeline.
What are the best ways to finance an office real estate investment?
The best way to finance an office real estate investment depends on your investment strategy and goals. If you plan to sell once you’ve completed capital improvements on a value-add opportunity, a shorter-term bridge loan could be a good option. If you plan to hold a property for a five- or 10-year period and want access to larger cash flows, a longer amortization period may suit your needs. An interest-only loan may also be worth the added risk for some strategies, as it offers lower debt servicing costs.
For more information, check out our blog post on 5 Considerations for Taking an Office Loan and our glossary entry on Interest-Only Loans.