Industrial and multi-family asset classes will remain the darlings of the commercial real estate market this year. Both asset classes have become essential investment classes for many investors due to high demand and growing rents. On the other hand, office buildings will lag behind, largely because of management responsibility and cost.
“Industrial and multi-family has certainly become bread and butter for multi-family investors”, Mike Longo, first vice-president at CBRE, tells GlobeSt.com. âOffice has become a third or second level. If you look at the best performing assets over the past seven years in terms of total return, the best performing have been triple net assets, followed by industrial and multi-family assets. Self-storage is also on the list. The worst performers in terms of total returns were offices, hotels and retail. “
The cost of real estate management of office assets has risen sharply. The operating costs combined with the high price of office assets made them difficult investments. âThe reason this office has underperformed is that the cost of operating an office building has just skyrocketed, and capital has recognized that,â says Longo. “Unless you have basic fill stability, a return, and a guaranteed return, investors are pretty savvy about how they’re going to underwrite those capital costs.”
However, office buildings have one major advantage over industrial and apartment assets, and that is their cost. âOffice is ideal for providing an opportunity to put a lot of capital to work, because office buildings often have larger checks and they trade more frequently,â says Longo. âThere are only a limited number of industrial buildings you can buy, and they tend to be smaller. The same goes for the multifamily. It is more difficult to make money work in these categories.
Of course, this trend is market specific and there are markets that will be an exception as well as office assets which are good investment opportunities. “” Said Longo. âSome markets are specific to these trends. However, investors shrewdly focus on the cost of capital it takes to run an office building today. “