Mid-Year Report: What’s Next for the Office Sector?

By Dennis Kaiser

The office sector has been quietly humming along behind some more attention-grabbing property sectors of industrial, multifamily or retail. As we near the mid-year milestone, Connect Media asked Tim Lee, Vice President of Corporate Development and Legal Affairs at Olive Hill Group, to share what’s happening in the office property sector. Check out his responses in our latest 3 CRE Q&A.

Q: At this point in the cycle, where can office investors continue to find valuable opportunities?
A: The suburban outliers of major metropolitan markets are areas that provide strong opportunities for investors.

These markets are experiencing tremendous migration from both residents and businesses, and provide investors with stronger opportunities for yield. The West Side of Los Angeles, for example, has remained the darling of the office sector for last several years. Yet today, we are seeing a migration towards its outlying submarkets such as Culver City, El Segundo, and even Hawthorne. In fact, large companies such as Tesla and Ring, Amazon’s home security subsidiary, have recently relocated to the Hawthorne area.

These submarkets provide businesses with strong value alternatives, compared to the rising rents in their urban core counterparts, and provide investors with favorable cap rates. We will continue to see businesses and investors shift their focus to these outlying submarkets over the next several years.

Q: What are some of the trends in the office market that are shaping your strategy moving forward?
A: We continue to place a significant emphasis on creative office space with open and flexible layouts. These types of creative properties have now become the norm, and are no longer only in demand by tech firms and media companies, but among traditional office tenants across a variety of industries.

We also focus on low-to mid-size properties, compared to high-rise office buildings. These types of office building are more conducive to creative amenities and better cater to the needs to today’s tenants.

For example, outdoor co-working spaces are often located on the ground floor, making access in a high-rise building much less convenient. Tenants want to be able to easily enjoy these amenities and features, which is driving increased demand to these smaller mid-size properties.

Q: What are your projections for the remainder of 2018?
A: The office sector, especially in emerging submarkets, will continue to perform over the next several years. National unemployment remains at historic lows, edging down to 3.9% in May of 2018. This incredibly low unemployment rate will continue to drive demand for office product forward, and investors will continue to shift their strategies to outlying submarkets where cap rates are more favorable and there is opportunity for higher yields.

For comments, questions or concerns, please contact Dennis Kaiser