Are you investing in Office Space right now?

Question

I know that Zoom is taking over the office, but I had a 1031 exchange to do and closed on a Class B office building downtown a couple weeks ago. Out of three suites, there are two vacancies, and it's underwater, but will be cash flowing when I get my next tenant in there, even with a reduced rent. It's my first office building. I really think that office will come back as people realize that working from home can't be done 100%. Is this speculating, timing the market, or simply a good investment in a depressed time? I'd love to hear what other people are doing right now in the office sector.

Paul Smythe · Answer

I'm pretty bearish on the office market. Occupancy hasn't come close to recovering and the longer-term leases are still coming due with tenants cutting or giving back space entirely. It's tempting to try to buy on the downswing, but I don't think we're done falling yet.

Taylor L. · Answer

I can see a case for office investing if you get a deal that's just too good to pass up, but overall I do not see offices as a general necessity.

Some businesses do need full capacity office space, i.e. doctors, dentists, manufacturing. However, many legacy type businesses simply do not need all of the office space they once had or thought they needed. That could mean a general contraction in the demand for office space, since a substantial percentage of businesses no longer need what they used to need.

All that being said.. I do know folks who are quietly doing some interesting office deals, largely because investors have moved away from office as an asset class. There will always be some need for offices, so there will be money to be made if you can buy the right asset in the right location at the right price.

Benjamin Aaker · Answer

@Rodney Sums Thanks for your comment. Not way off base at all. It's a great idea to have multiple exit strategies. This property is on a major arterial in Sioux Falls (Minnesota Avenue). Moving into retail comes to mind. We are zoned commercial - 2, so some kind of short term residential is a possibility. We have plumbing to the common area and one of the three suites, so there would be some work to make the change, but certainly an option if office completely tanks.

James Storey · Answer

We are selling a decent amount of office investment sales here in Indianapolis. It is still appealing to a lot of investors mainly for the higher cap rates and lower competition. We are selling some at 8.5%-9.5% CAP rates. The larger risks are the office spaces that have larger units say 7,000+sf. The better investments tend to be multi unit buildings with the average unit size of 1,500sf. From my experience as a broker, those units are always leased out and take a much shorter time to find a tenant replacement in the unit goes vacant.

James Storey, CCIM

Benjamin Aaker · Answer

@Ronald Rohde PP is 7 years. That being said, I'm not immediately fully leased, so I have to add that to the period. Was this deal better than cap gains tax? I suppose I would have to compare that to what I would do with the money (minus the tax) otherwise. Multifamily can still be a good investment but people are bringing stupid money in right now, depressing the cap rates. Single family is out for obvious overpriced reasons. A good value-add MF is probably the only way to go. They still exist, but I would have to factor in the time it takes to find the deal while my cash is sitting in a low-interest rate, but liquid account. Thanks for your comment.

Chris Seveney · Answer

@Benjamin Aaker

Definitely depends on location and size. What’s interesting is I know a company whose downtown dc portfolio is taking a hit in prime locations due to firms downsizing but their suburban office space is booming

3 years ago they couldn’t give away suburban office space. It’s cyclical and if you can get a good buy - then go for it

Rodney Sums · Answer

This thought may be way off base, and I know little about CRE but just an idea:

If it fails to perform as an office how hard would it be for you and other tenants (if applicable) to get the building zoned for other uses or, how flexible is the zoning?

Can it be repurposed?

Benjamin Aaker · Answer

@Russell Brazil How has your office purchase gone in the past year? Glad you bought it or would you rather not?

Benjamin Aaker · Answer

@James Storey That's good to know. These three units are 1000, 1200, 1500 square feet, so pretty close to the sweet spot you mentioned. As an update, I got an unsolicited LOI for my second suite today. Doing some negotiating, but we are pretty close on terms.

Benjamin Aaker · Answer

@Taylor L. Thanks for your insight. I hope I'm one of the people quietly investing in Office going to do well. Except, not quiet anymore with this post about it!

Are you investing in Office Space right now?

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