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Helpful tips on investing in office buildings.

Byline: Jennifer Sharpe

Thinking about making an investment in an office building? Some industry professionals share top things potential investors need to consider.

Costs of ownership

It is critical to not overlook or underestimate the costs of ownership for an office building.

"For a true multitenant office investment building, an investor needs to consider all of the costs involved. These include maintenance costs, and costs to keep the building acceptable for its current tenants and to remain a competitive and attractive office building for other tenants in the market looking for space," said Adam Rumsey, vice president, investments for Newmark Grubb Levy Strange Beffort.

More expense is usually involved in the office market than other commercial real estate sectors, said Brent Conway, first vice president with CBRE.

"With office, you are not going to have a vanilla shell like you would have in the retail environment, or a cold gray shell that you would have in the industrial environment. Instead, you are going to have tenant-occupied space that is finished and move-in ready. You have to consider how much of that you are willing to pay for as the landlord, and how much the tenant is going to be able to pay for," Conway said.

Those costs crop up again when there is tenant turnover.

"Traditionally office leases are longer in term than many other forms of lease, but there are still a lot of upfront costs," he said. "Generally, when tenants move out, the next client that moves in is going to need new walls moved, new flooring, new paint, so you'll have to reinvest in that space."

Goals

When making an investment in office space, it is important to know your goals.

"A real estate investor is looking for a building that they can create a rent roll in at a certain capitalization rate," said Rick Guild, president of The Guild Company. "As an investor, you look for the upside on the rents. Have the rents been pushed? Can you lease up the remaining vacancy? Other considerations are stability of occupancy, the right location and any tax benefits."

Companies investing in an owner-occupancy opportunity have unique goals.

"What most tenants want that are buying an office building is to be in control of their office space," said Guild. "They've been somewhere where they could not expand or do something that was important to their business plan because they didn't own the building. When you own the building, you don't have to answer to anybody about taking more space, or about not renewing somebody's lease. You have the ultimate in flexibility."

A subset of owner-occupancy clients will even look to be landlords if they acquire more square footage than they need for their company.

"Clients usually have a square footage amount that they are looking for, and if they want to be a landlord, then that is a different analysis than if they are going to occupy the whole building," said Guild. "If you are going to have additional space available, and you want to lease that space out, how are you going to execute that?"

Conway said the office investor who has a long-term strategy in play or looks at it from an upside potential is the one who generally comes out ahead.

"As an investor, you get a longer-term depreciation, and you can accelerate depreciation as an investor or as an owner-occupant for certain items that depreciate quicker," he said. "A qualified CPA is the best source for tax information."

Know the market

As with any commercial real estate opportunity, it is important to thoroughly know your market. That can be a simple issue of supply and demand. If the market is flooded with office inventory, there might not be enough demand to adequately utilize the available supply.

"The biggest challenge when investing in office buildings is attracting and retaining tenants within a market that has a surplus of high-quality for-rent office supply and competitive lease rates," said Rumsey.

Sometimes, the dominant industry in a market will affect the office sector of commercial real estate.

"In the right market, a safe commercial real estate investment is going to be your office environments," said Conway. "In Oklahoma City, we are more susceptible to the market than any other form of commercial real estate in Oklahoma City because so much of our inventory houses oil and gas companies or ancillary providers. Our occupancy can be driven largely by the energy sector, so it's a lot more volatile."

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Publication:Journal Record (Oklahoma City, OK)
Date:May 23, 2019
Words:756
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