Despite what you hear about “remote working” and the “gig economy” where workers sit in their bedrooms, typing emails on their laptops and using apps like Slack, most companies still prefer the traditional office. While remote workforces allow them to save on rent, they usually cost them more in lost productivity. There’s just no substitute for physically gathering people up and putting them in an office building to get on with the work of the company.
For investors, this is good news. It means that lucrative office investments are going to be with us for a while yet – perhaps indefinitely.
Why Invest In Offices?
Why do people love investing in office buildings so much, though?
The number one reason is their profitability. Offices make a lot of money. They’re essentially just big boxes with bathroom facilities and are usually occupied by high-margin companies willing to pay a lot of money.
Law firms, for instance, make substantial profits. What’s more, many of them aren’t run by lawyers with an entrepreneurial spirit, looking to eke out as many savings as they can. Usually, all you have to do is name your price, and they’ll pay it.
If you run a company and want to get into the market, then getting a fast, flexible loan to buy a property is also relatively straightforward. Often, you can go to bridge lenders who provide you with a short-term loan while you seek long term financing on the regular commercial mortgage market. They make getting the capital that you need much more comfortable than it ever was in the past.
Is Office Investment Risky?
One of the reasons that office investment returns are so high is because it is risky. In the aftermath of the dot-com bubble, thousands of businesses went broke, leading to a significant fall in office demand. Many plots went unoccupied for years, leading to big losses for their owners.
With that said, with substantial risks come handsome rewards. Offices not only provide stunning returns when the economy is good, but they also tend to have long lease periods, unlike the standard property rental market. Businesses will often sign up for three years or more, instead of just twelve months at a time.
Vacancy rates can be a problem. While it’s true that firms will sign up for long tenancies, the number of companies in the market is usually smaller than you think. That can mean that you’re waiting a long time for somebody to finally sign a contract with you.
The best strategy is usually to buy a building that already has a tenant with time left on the lease. This set up allows you to look for new prospects while the current contract winds down to a conclusion.
Buying an empty building is usually a bad idea unless the seller has a list of clients ready to occupy the building once it is complete. Try, where possible, to avoid buying offices in depressed or run-down areas unless you expect an economic turnaround.