Multifamily vs Office spaces as CRE investment

[Ravi Arora]

Howdy folks. Newbie here.

1. How do the office spaces compare to multifamily (or living spaces for that matter) as investments? In my experience, I mostly hear houses or multi-family as the first and foremost cash flow investments. I am guessing that their popularity can be attributed to the fact that most people own houses and are familiar in operating those?

2. What are some good websites ( other than BiggerPockets) that offer calculators for performing investment analysis across asset types?

Thanks in advance for sharing your experiences! 

[Joel Owens]

I like small box retail properties better. Out of the 2 you mentioned I like multifamily. I do not care for office unless medical NNN lease property.

The reason is office can have  a lot of negatives. When economy goes on down slope for cycle it's easy for office owners to cut out physical spaces unless the smaller subset of businesses that actually need a walk in space for consumers.

So office:

1. Business owners can take less space in a building wanting to downsize from current lease.

2. Business owners can shut down office all together and move to their house to save money.

3. Business owners can move to cheaper warehouse type space

4. Easy for owner to quit and shut down to move with just a few desks and folder with phones versus a retail storefront that needs visibility and keeps the place inside looking good for consumers who patronize the business.

If you go for office make sure it's not condo as you are not controlling declarant in most cases and you can have ongoing costs plus special assessments that are out of your control. Office if buying upper level make sure has elevator or if buying whole building. Upper floors without elevator are very hard to rent and when they do rent it is less rent per ft. Same with units on the backside of a building or have to go down stairs to get to.

Pay attention to office for that areas saturation levels of inventory per sq ft for lease along with new builds slated and how much of that sq ft is being absorbed in the market (supply versus demand). Even if no new builds if tenants downsize it can create a glut of space on the market to lease up. I saw in last downturn office reach vacancy levels of 25% for markets. When economy has upswing more new business starts happen so office tends to do better so that investment class is more cycle sensitive to timing issues.  

The yield would have to be really high on office and I would have to be getting really below market rents per ft with a good location to consider taking on that asset class. Even then I like retail better. Office tends to be gross leases or modified gross leases where the landlord is absorbing lots of the cost for expenses, repairs, replacements to the property. You have to get an inspection and make sure you get a credit from the seller so you are not heavily impacted with upfront costs that eats into cash flow for years reducing returns. Lots of sellers like to patch things to suck out max cash flow and then sell a building that does not meet industry standards for condition and care. They then want to dump it on an unsophisticated buyer. Doesn't work that way. Seller has to pay now for deferred maintenance in the form of a credit for decisions they made while owning the asset.

Multifamily can be good but trading at crazy low cap rates. Also as property taxes rise and other costs you do not get reimbursed like retail NNN leases. So if rent growth does not stay super strong for multifamily it can start eating into returns with stagnant rents and increased operating costs.

Almost any asset class can be profitable if purchased right and operated the right way with multiple exit strategies. Some investors will see more or less risk based on their individual knowledge level and skill in a particular asset class.