A real estate investor needs to be both a good analyst and a great capital raiser. KISS guides are meant to help you solve one of those two needs: a better analyst.
Keep It Simple Stupid guides are meant to provide investors a framework for understanding the supply-demand indicators and valuation techniques within each major commercial asset class. Last time, we discussed KISS guide to Multifamily Assets; this week we discuss Office Assets.
The Basics of Investing in Office Buildings
The “office building asset class” is composed of buildings with high, mid or low-rise structures that account for roughly 20% of the total commercial real estate market. The office asset class presents unique set of challenges given that historically it has been the most volatile sector relative to other real estate asset classes. Office investments are a low Sharp Ratio investment class, driven by a high volatility due to a combination of macroeconomic, supply and demand and property specific factors.
Hence it is vitally important that before making your first office investment, an investor work through the investment analysis framework. The funnel starts with the Market Analysis and works its way down to the Investment Analysis.
Market Supply-Demand Analysis
Office assets are driven by a complex mixture of macroeconomic and supply-demand trends. The key indicators for each force (supply or demand) to keep in mind are as follows:
Growth (Demand) Indicators
- White Collar Job Growth: projected job growth as indicated by the Bureau of Labor statistics survey can be a great leading indicator for office space demand growth by space users.
- Economic Growth: increase in the overall economy or regional economy increases the likelihood that business will hire more workers on a full time basis and, in turn, will require more space for these additional workers. This can be tracked by …read more