Office Investors versus Office Users


Kenneth P. Riggs Jr., a leading national expert in real estate trends, recently published
a terrific article ( titled: “The Risk Factor: Commercial Real Estate Offers Stability to Nervous Investors”.  Here’s his take on office space (the emphasis is mine).  Please keep in mind that he is looking at this from a national perspective.

“Given the lack of office-using employment growth and the increasing ability to work from home, the office sector, especially in most secondary markets, is generally the riskiest investment property. However, there are some positive
fundamentals. Office vacancy declined to 17.5% in 1Q11, which was the first decline since the recession began. Absorption was positive and asking and effective rents increased for the second consecutive quarter. Our 12-month trailing analysis indicates that the volume of transactions $2 million or less increased by nearly 5% in first quarter, but the size-weighted average price psf of office space declined by about 5% to $76 psf. However, the
weighted-average cap rate for the office sector increased by 10 basis points to 6.8 percent, the only property type where the cap rate increased during first quarter.”

So what does that mean?  Investors still love to buy office buildings, but the tenants aren’t filling up the buildings quickly.  It’s an interesting dichotomy.  It appears that investors are not realizing that companies are reducing their ratio of office space per employee.   The average work space today is ONE-THIRD the size of 1970’s work space. The amount of private offices is being dramatically reduced. The amount of square footage per employee is shrinking. This results in savings for a company’s real estate expenses but now what are investors going to do with all these office buildings?

The absorption of Miami office space is trailing behind other large metropolitan areas due partly to our higher than average unemployment and the over-building of Class A office
buildings in the past three years.  Some individual buildings are out-performing the market and are able to increase occupancy,  however, many continue to struggle.  Although we may be at the bottom of the rent cycle, it is never too late to think about a strategy for your office lease.  Call me today at 305.753.5435.


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