Class A Office Outlook

What are your thoughts on the outlook for Class A office space?

It seems to me that demand will be on a permanently lower trajectory and that will lower rents overall. Land prices will need to decrease in turn. And while Class A office buildings will continue to have high occupancy rates, they will have more tenants, each with less space on average than they had a year ago.

How do you all think major office developers will perform over the next five years in this new environment? If they were targeting 18% IRR's pre-pandemic, might that come down a couple percent as a result of this transitional period?

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Comments (6)

Apr 4, 2021 - 2:16pm

I personally think office is going to come back to normal. I don't think work from home is here to stay. Maybe it becomes 3 days in office 2 at home or 4:1, but overall, I think the office will come back strong. We are starting to see some tech companies who announced WFH forever walk that statement back. I don't think office will be a great investment over the next 2-5 years, but over the next 10 years it'll come back. 

I view WFH like creative open floor plan office. It was the hot thing for 5-10 years and than everyone figured out they hated it. That's what WFH will be in 5-10 years. 

short term outlook isn't great, but long term it's fine. I know this is a ramble and not making solid points, just typing off the cuff on my phone. 

regarding targeted returns, I don't think those will come down. More realistically, prices will adjust and come down, or people will begin to get aggressive if they believe they can get their target. But targets aren't reality. I don't believe targets will adjust and remember they are just that - targets. Every opportunistic investor targets 20% IRR and 2x equity multiple, but when you ask if they actually get that...they all laugh, because they really don't. 

Apr 4, 2021 - 2:27pm

Think it'll be fine. Class A office landlords will just offer concessions & appealing amenities. I think the real squeeze will occur for Class B. Because Class B tenants will just be incentivized to go for Class A because of the great deals in the market today. 

WFH is here to stay in some fashion, obviously not 5 days a week like we have it now. But firms will definitely need to offer employees at least 1 day a week to WFH. The only companies I still see demanding that their employees come in 5 days a week are REITs, REPEs, and Owner/Operators - think BX/SW/APG/RXR/REL/VNO/TSH. 

Anyone dispelling the future of WFH is delusional or just trying to mislead others. For example, Steve Roth (CEO of VNO) and Marc Holliday (CEO of SL Green) both basically said WFH is trash and it won't survive. I would take their advice with a grain of salt because they are largest office owners in NYC. They have a vested interest in the future office, WFH messes up their business plan. 

Apr 4, 2021 - 9:40pm

Yeah it's comical when I see linkedin posts from office brokers claiming that there will be no impact on the office sector.  Like come on man, no one will take you seriously unless you at least admit that there will be somewhat of a significant impact.  

  • Associate 2 in RE - Comm
Apr 9, 2021 - 4:07pm

I think this thought makes sense if the Class A properties can offer those concession packages or lower rents.  I see this working for deals transacting in the next 12 months but some of those owners may be stuck chasing deals that only make economic sense to their basis.  If values come down and you have someone swoop in and grab a Class A asset at a solid basis and they are underwriting these new TI and concession packages sure this theory holds up but I just don't know if that's what happens across the board. 

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