Over the past year, my firm and others have committed hundreds of billions of dollars to acquire office properties across the country. In years and decades past, these deals would have hardly raised an eyebrow—the office sector has been a stalwart of the commercial real estate industry, with urban trophy assets virtually guaranteed to generate steady returns for skilled investors.
Yet since the onset of the pandemic, even the most high-profile assets in economically thriving, fast-growing cities are plagued by a cloud of uncertainty hanging over the office sector. To the untrained eye, that may be understandable, as the rise of remote work and enduring behavioral changes among workers have left the sector irrevocably altered.
The sector is now at a major inflection point, however, as the pandemic continues to fade and occupancy rates across the country steadily rise. While many have fled over the last two years, those that had the courage to capitalize on the industry’s downturn—as well as the skill to adapt it for a new era of work—are poised to capture incredible upside.
For the last 36 years, the heart of CP Group’s business model has been our ability to generate value at office buildings. Historically, one of the ways we do that is by undertaking major repositioning campaigns which transform our acquisitions into attractive investments for our equity partners.
The concept of “value-add,” however, has taken a new meaning for office assets following the pandemic. Many of the characteristics that make a building desirable—a prime location in a dynamic neighborhood, architectural significance, large windows and in-house amenities like restaurants, cafes and gyms—have evolved along with tenant and worker preferences, and office operators will need to adjust in kind.
As tenants continue to return to these buildings, many are less concerned with an upgraded lobby than with highly flexible spaces that can be quickly and easily changed in response to any kind of disruption— whether that involves their business, the preferences of their employees or to the market. Similarly, many workers are more likely to find value in amenities geared toward accommodating their shifting lifestyles.
Many working parents, for instance, may now prefer a daycare facility occupying ground-floor retail space, rather than more traditional options like a banking center or café.
Both tenants and the investment community are also fueling the adoption of green and ESG-related initiatives in office buildings, as more and more major operators commit to reducing carbon emissions, invest in safe and highly sanitized environments and take a more active role in fostering occupants’ physical and mental health.
While savvy investors and owner-operators know these attributes will generate massive value as the office sector continues to rebound, location—like with all real estate—remains critical.
Our investment thesis has always been predicated on positive migration and other demographic trends in what we call the “SMILE states,” stretching from the Southeast to western markets such as Texas, Arizona and Colorado. The pandemic poured gasoline on those dynamics that show no signs of slowing even as we resume more of our previous way of life.
In Florida alone, out-of-state companies ranging from private equity and major investment banks to tech firms like Microsoft and Apple have all announced plans to establish a presence in the Sunshine State.
As occupancy rates continue to increase across the country and public health guidelines begin to treat COVID-19 as more endemic, these regions are uniquely positioned to generate real value for those who remained active in the sector. Investors dedicated capital toward the perceived more stable waters of industrial or multifamily over the last two years, but rapidly expanding interest rate spreads, escalating costs and supply issues are now causing them to reexamine their lack of office exposure.
For those who were willing to bet on the many empty and neglected office buildings, their faith appears to be on the verge of being rewarded. Absorption rates are accelerating across the country—particularly in the Southeast and Southwest—both of which were largely spared from large-scale lockdowns and other COVID-related regulations that are still lingering in many gateway markets.
Any major disruption—whether it involves a market bubble or a once-in-a-century global pandemic—eventually creates clear winners and losers. The office sector has weathered historic levels of unpredictability and whirlwind market shifts over the past two years, even as investors and even many owners fled. Those firms who doubled down—identifying the right assets that could be successfully adapted to a new era in both our economy and work culture—now appear ready to reap the rewards.
Brett Reese serves as senior vice president with national office investment and operating firm CP Group.