There is phenomenal demand for office buildings across the U.S. as investors are seeking properties with high vacancies. This allows investors to provide value-add for long term cash flow growth and price appreciation. Even lenders are willing to lend to real estate companies who are providing value-add strategies. Lenders are expecting their return of capital, as well as, their return on capital by financing commercial real estate deals. With higher vacancies in core office building properties, higher cap rates will allow investors to purchase them at cheaper values. As the absorption rate of leases increase over time, cap rates will decrease and higher profit margin will be achieved for investors.
Excerpts from the Article: “Facing premium pricing on core, core-plus and value-add assets, investors are willing to accept more risk and pay higher prices for vacant or nearly vacant office buildings, or those that are about to be empty,” said Nussbaum.”
“Patrick Fitzgerald, senior vice president of BankUnited’s commercial real estate lending group, agreed that value-add strategies for office investment are in vogue and that lenders are increasingly willing to make money available for buying buildings with high vacancy.“
“Historical returns for real estate show that most of the return comes from property cash flow rather than asset appreciation,” Fitzgerald said. And with asset values in many primary markets already at or above 2007 peak valuations, investors are increasingly looking for alternatives. That’s why evaluating a potential acquisition for improving NOI is becoming increasingly important, he said.
Citation and Link: Heshmeyer, Mark. “Investors Finding Ways To Reduce risk in High Vacancy Offie Building Buys” Costar News. 25 Mar. 2015. 01 Apr. 2015 http://www.costar.com/News/Article/Investors-Finding-Ways-To-Reduce-Risk-in-High-Vacancy-Office-Building-Buys/170038
Picture Link and Citation: “Office Building Pictures” 15 Oct. 2001. “Freefoto.com.” 01 Apr. 2015 http://www.freefoto.com/preview/11-03-65/Office-Building