Office Building Investing for Beginners
Real estate can be a lucrative investment for anyone and investing in office buildings specifically can be a rewarding and profitable venture. Office buildings can be highly beneficial because they usually have longer leases and can generate a higher income. Office buildings make up about 29 percent of the total amount of the commercial real estate market. This percentage covers low, mid, and high-rise buildings, so there is plenty of opportunity to find a good office building to invest in.
Classes of Buildings
There are three classes of office buildings to look at when you decide to invest in an office building.
Class A is made up of the highest quality office buildings on the market. These are often relatively newly constructed, and they have top quality technological systems, amenities, HVAC, and fixtures. They usually have a notable presence in a highly visible location.
High-rise buildings often fall into this class, and there is usually a large central lobby in the buildings. These buildings usually house high-profile companies, like law firms and financial institutions.
Class B office buildings may not be quite as prominent as a Class A building, but they are nice buildings with decent locations. They are usually no more than four stories tall and are usually in or around the suburbs. Class B buildings are older than Class A buildings, in fact, many Class B buildings began life as Class A, but got downgraded when signs of wear-and-tear became noticeable or after about 10 years.
A Class C office building is usually found in one of the more undesirable locations of a city. They tend to be over 20 years old and are in need of renovations or major repairs. These can be sold as "fix-me-ups," for the investor who is up for a challenge. With enough work, they can be upgraded to a Class B building.
The rent in these buildings is significantly lower than the other two classes, and the tenants usually have much smaller businesses and are only in the building because better offices are too expensive.
If you decide to invest in an office building, you should spend some time researching the local job economy first. "The office sector typically thrives when the economy is growing and companies are expanding, as firms seek more space to accommodate the addition of new workers." When there is a plateau or decline in growth, the office sector will begin to struggle. When renting out new spaces, the rent may fluctuate depending on these circumstances, and without some flexibility, office buildings can sit empty for months.
Mid-rise buildings have become more popular in recent years as the demand for creative office and co-working spaces continues to increase and it has been becoming clear that this type of design is not as effective in a high-rise building. In fact, some mid-rise building owners are finding that tenants will pay top dollar to rent out space with this type of environment in mind.
Designing an office building with this co-working space in mind can help keep tenants in the long-term because they will have a sense of community in the building that will make them more likely to stay and continue to renew their lease.
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Formigle, Ian. “How to Invest in Office Real Estate.” CrowdStreet, 29 Aug. 2019, www.crowdstreet.com/resources/investing/office/.
Lee, Tim. “Why Mid-Rise Buildings Are the Future of Office Investment.” National Real Estate Investor, 15 Mar. 2018, www.nreionline.com/office/why-mid-rise-buildings-are-future-office-investment.