Has your business received a big boom in the recent years? Are thinking about expanding it? Maybe you are in need of office space to move your business to? Or maybe you are just want to invest in commercial office space? Whatever your reasons are, people looking to invest often find the process confusing, and are unsure of the things they should think about. In this article, we talk about some of the most important things to keep in mind when investing in commercial office space.
The basics of investing in office space
High, mid and low-rise structures are all a part of what is called the “office building asset class”. This class is somewhere around 20% of the commercial real estate. However, throughout the history, it has given the most problems (relative to the other real estate asset classes) to those looking to invest in real estate.
The asset has what is known as a low Sharp Ratio investment class. This is because of multiple reasons, which include macroeconomics, supply and demand, as well as some factors tied to a specific property.
Because of all these reasons, it’s very important for you to have an investment analysis framework. You need to analyze both the market and the investment you are planning to do.
Do a market analysis before you invest in commercial office space
When looking into the state of the market, we need to think about supply and demand. There are a couple of key factors for both of these.
When looking into demand (or growth) indicators, you need to think about the white-collar job growth, as well as the economic growth.
- You can check the Bureau of Labor‘s survey about projected job growth. This is a great indicator of how much space is being used, and how much you might need. This might also tell you whether you want to rent or buy office space in NJ.
- And as far as the economic growth goes, you need to look into the economy of the region or the country. Is there an increase in the economy? That means that there is more chance for business to hire more workers to work full time. As a result of this, they will need more office space for those workers. You can find useful data on the Bureau of Economic Analysis website.
As far as the supply (headwind) indicators, things get a little complicated. Here, you need to think about three factors – vacancy rate, absorption rate, and nearby market supply.
- First, you want the vacancy rate to be as low as possible when you want to invest in commercial office space. High vacancy rate means that the rent per square feet declines, and thus the turnover of buildings increases.
- The absorption rate represents new buildings that are leased into the market during a period of time. It mirrors the vacancy rate – if the absorption rate is rising, then rents will be rising too.
- When looking into nearby market supply, watch out for the substitution effect for Class B and C buildings. It keeps rent growth in check, even though the absorption rate might be on the rise and the vacancy one on the decline.
The factors of investment analysis
How that you have analyzed the market, you will find properties that you are interested in investing in. So, the time has come to analyze the investment itself and see if it is going to pay off. There are three types of tenants you are looking at:
- Specialized tenants. There are buildings constructed with a certain purpose – for example, research and development buildings will not have the same people and equipment in it like a regular office building.
- Agonistic tenants. These are the ones that go for a suburban setting and a standard building.
- Niche renters. These buildings are there for a certain business type. For example, if a building is close to a hospital, you might have medical practices or labs there. These types of buildings need to fit the needs of certain niche renters.
Understanding the difference between these three groups will help you decide whether your investment is fit in the current market. Before calling commercial moving companies in New Jersey, you need to know that you will meet the end goal. When trying to invest in commercial office space, that usually means making money.
Think about office building structure and class
Another important thing to look into when investing in commercial office space is the structure of the building itself and the class of the building.
Due to their vertical layout, there are three categories of buildings – high, mid and low-rise. However, you should also check their square footage, as well as the square footage per floor plate. Investors often don’t look into the latter of these, but it’s important. The reason for it is simple.
If your floors have huge square footage, then the building core will be pretty far from the light source. On the opposite side, if this number is fairly small, then you will not have room for all your equipment, and packing services NJ might also have a problem getting all boxes to your office space.
The class of the building is its “rating” – just like in apartment buildings. Keep in mind that these are not general – they differ from a market to market. This is why it’s important to do the market analysis prior to dabbing into the building classes.
- Class A buildings have “the best” rating due to many factors. They have high visibility, luxury addresses, and zip codes, or just the proximity of multiple assets.
- Class B buildings are older than Class A, but they are just as functional. The thing that lowers its rating are some less appealing design elements. This is why the rents here will be lower.
- Class C buildings are the oldest and they are in less desirable locations. However, they are attractive to those looking to make a turnaround and flip a commercial office space.