The office sector continues to adjust to changes in how companies and employees use the workplace, but those changes are producing very different outcomes from one property to another.

A recent analysis from investment consulting firm Meketa, highlighted by Connect CRE, argues that investors should be cautious about viewing office real estate as a single market. While some properties continue to contend with vacancy, declining values and substantial leasing costs, others are commanding strong rents and benefiting from improving demand.

Many of the forces reshaping office properties were already underway before the pandemic. Coworking, changing workplace preferences and competition from other real estate sectors were influencing investor strategies well before 2020. Remote and hybrid work subsequently accelerated that evolution and changed what tenants expect from their physical workplaces.

At the same time, the economics of owning office assets have become more complicated. Tenant improvements, leasing expenses and other capital requirements can be significant, making building quality, tenant demand and future capital needs increasingly important considerations when evaluating potential acquisitions.

Local Markets and Individual Assets Matter More

Perhaps the biggest change for investors is the widening gap between buildings and markets.

Office performance is increasingly influenced by local employment conditions, population trends, tenant preferences, building quality and the ability of an asset to compete for companies seeking attractive workplace environments. Two properties that appear similar on paper can therefore produce very different results.

The same applies geographically. Some urban business districts are seeing stronger recoveries, while other markets continue to search for a sustainable post-pandemic balance between office demand, available inventory and alternative uses.

That fragmentation creates additional risk, but it can also create opportunity.

Rather than making broad decisions about whether to invest in office properties, investors may increasingly need to evaluate individual assets, submarkets and capital structures. Properties capable of attracting tenants may benefit from limited new supply, while other buildings could require substantial repositioning or conversion to remain viable.

For investors willing to analyze office real estate property by property rather than treating the sector as a single investment category, the current disruption could be creating opportunities that aren’t apparent in the broader market statistics.

Source: Connect CRE, based on analysis from Meketa