Types of Commercial Real Estate: (Part 2 of 6) Office
Updated: Feb 3
Office real estate is leased to companies for operating their businesses. Demand for office space is strongly influenced by macro fundamentals like GDP and job growth, as well as structural trends, including the rise in hybrid working, urbanization, and changes in living, working, and commuting patterns. Traditional office leases are long-duration, ranging from three to 10 years, which reduces leasing risk. At the same time, these assets may also require heavy capital expenditure to prevent obsolescence.
Sub-categories of office properties available for investment include:
Central business district (CBD) offices: Prime offices located in downtown city centers can command premium rents. Central business district offices may consist of glossy skyscrapers and the corporate headquarters of some of the world’s largest companies. They are typically characterized as Class A with modern amenities and may also be environmentally friendly.
Suburban offices: High-rise, mid-rise and low-rise buildings located outside downtown areas are included in this category. While suburban offices have historically generated rent in line with the market average, their investment appeal has grown in recent years due to factors like larger floor space plans and shorter commutes.
Co-working spaces: This category includes office space leased to workers from different companies as well as self-employed professionals, generally on an as-needed basis. Tenants using these shared workspaces typically sign shorter-term leases, ranging from monthly to annually, which increases occupancy and credit risk.
Niche offices: Office buildings leased to tenants in specific, fast-growing industries are considered niche offices. Popular examples include life science companies like biotech pharmaceutical companies and medical facilities. Properties outfitted for specific use cases like these have been in high demand, commanding premium rent in many markets. For example, life sciences has a strong foothold in the D.C. metro area, and biotech has deep roots in Boston.
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