Office Sector Recovery: What will it mean for tenants?

 Soon to sell:  2030 Main Street (center above) is the latest building in the John Wayne Airport market to be offered for sale.  The price is expected to exceed $350 per square foot.

Everywhere we look there are signs of the economy recovering.  The Dow Jones Industrial Average has exceeded 15,000; prices of residential real estate assets are heading ever higher; more and more people are able to find work (so says the April Jobs Report).  Despite the fact that there are some major “hurdles” in front of us, the overall economy seems to be improving.  Given all the reports of these key economic indicators improving, wouldn’t it stand to reason that the commercial real estate sector, specifically the office sector, improve as well?

Green Street Advisors thinks so.  Green Street is a Newport Beach based research and consulting firm specializing in the institutional commercial real estate sector which recently reported that their Commercial Property Price Index  (CPPI) increased a full 1% in April, and has increased 9% over the last 12 months.  What is striking about these figures is that the CPPI has reached a level that is one percentage point higher than the previous high reached in 2007!  Green Street credits low interest rates, operating fundamentals, and a vibrant financing environment for the increases.  You can see the full report here.

What will this mean to office tenants trying to navigate through this changing market?  First, price increases usually lead to increased sale activity.  As prices move upward, more and more buildings change hands.  Things to watch out for when buildings change hands are increases in operating expenses (usually due to higher property taxes) as well as changes in the level of service the tenant is receiving from its current owner and/or manager.  Also, when new buyers are paying more for real estate assets, their revenue expectations are also higher.  Meaning, they paid a lot for your building, so they want more rent!  Remember, just because they paid more for your building, doesn’t mean the rent they want to charge is justified.  The entire market, not one building, determines market rents.

Working with a tenant representation specialist who can help you navigate the changing office market will ensure you are making informed decisions about your office lease.

If you have questions about the current state of the office market, or would like to speak with someone about specific issues with your office lease, please contact me directly at 949-721-8880 or at bill@whitespaceadvisors.com

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