Office Properties

Commercial Real Estate Office Properties Q4 2012 and Beyond

John McDermott Sperry Van Ness
John McDermott, Office Product Council Chair, Capital Partners | SVN

Going forward, there are a lot of reasons to be excited about the commercial real estate brokerage opportunities in the office property arena. Of the leading property types, office property by its very nature requires those dedicated to the product to be true advisors to their clients. Whether pursuing landlord representation or tenant representation on the leasing side or traditional investment brokerage of the asset class; the extreme “added value” role has never been more critical to the process and valuable to the client.

The Sperry Van Ness® difference and our competitive advantage in smaller secondary and tertiary markets as well as our suburban footprint coincide perfectly with the shift of investor interest to those markets and sub-markets for office properties; both for tenancy (less commuting with $4 and $5 gas prices) and investments (suburban office sales volume YTD 2012 are up 29%). Improving financing options, low interest rates and the on-going hunt for trophy assets outside the CBD continue to be fueling the office marketplace. The sale prices for office product in tertiary markets saw a 30% surge so far in 2012 and are likely to remain strong in 2013 and beyond.

On the brokerage side, it comes back to the most fundamental realities of our business and that is clients only become active when they either have a problem or see an opportunity. Office is a product that has both in a very big way.

Understanding these factors, identifying them and acting upon them will provide significant earning opportunities for you at SVN, particularly in the next two to five years.

Problems in this market include:

  • Vacancy
  • Shifting demographics
  • Lingering rent rollover risk
  • Weak health and financial well-being of many tenants
  • Lack of demand for traditional space
  • Lack of funds for tenant improvements and leasing commissions to fill vacancy

Additionally there may be a lack of reserves to stay competitive and improve a property to increase tenant retention; too often a capital stack on the property that is either burdensome or unable to be refinanced without a significant cash infusion; and the competition of bank owned or distressed product in the marketplace.

Opportunities in this market include:

  • Lack of any significant construction in more than three years
  • Suburban and main street office investments in secondary and tertiary markets are offering 120 bp to a full 200 bp return advantage over the major or gateway markets
  • Price per foot acquisitions are well below replacement cost without the costly lead time of construction and absorption

Additionally, many investments offer vacancy upside where the investor can be the “low cost provider” in a region or sub-market and capture more than their fair share of tenants who are looking and tenants who perceive they are getting a bargain, are taking space “as is” or with minimal improvements, often at their own expense in exchange for a small rent abatement or deferral.

In the end, the advisor who is aware of these problems and opportunities will be able to get “in the middle of deals” in 2013 and beyond. Whether helping clients to reposition their existing assets, add value to a newly acquired asset or dispose of an existing asset; commissions, property management fees and asset management fees will be earned. Pay special attention to medical office space, open and first generation space and in fill spaces, particularly the smaller spaces.

– John P. McDermott, Product Council Chair | Office Properties, November 2012


*All Sperry Van Ness® offices are independently owned and operated.