Industrial and multifamily will remain the darlings of the commercial real estate markets, while office will fall behind.
Industrial and multifamily asset classes will remain the darlings of the commercial real estate market this year. The two asset classes have become core investment classes for many investors because of the strong demand and rent growth. On the flip side, office properties will lag behind, largely because of the management responsibility and cost.
“Industrial and multifamily has certainly become the bread-and-butter for multifamily investors,” Mike Longo, SVP at CBRE, tells GlobeSt.com. “Office has become a third or second tier. If you look at the best performing assets over the last seven years in terms of total return, the top performers have been triple net assets, followed by industrial and multifamily. Self-storage is also on the list. The worst performers from a total returns standpoint has been office, hotels and retail.”
The property management cost of office assets has increased sharply. The operations cost combined with the high price tag of office assets have made them challenging investments. “The reason that office has underperformed is because the cost to operate an office building has just skyrocketed immensely, and capital has recognized that,” says Longo. “Unless you have core infill stability, yield and guaranteed yield, investors are pretty shrewd on how they are going to underwrite those capital costs.”
However, office properties do have one major benefit over industrial and apartment assets, and that is their cost. “Office is great at providing an opportunity to put a lot of capital to work because office buildings often have bigger check sizes and they trade more frequently,” says Longo. “There are only so many industrial buildings that you can buy, and they tend to be smaller. The same goes for multifamily. It is harder to put money to work in those categories.”
Of course, this trend is market specific and there are markets that will be an exception as well as office assets that are good investment opportunities. “,” says Longo. “Certain markets are unique to these trends. However, investors are shrewdly focused on the capital cost that it takes to manage an office building today.”
