What's The Office Game Costing You?
The rise of working from home, co-working spaces and increasingly harsh economic realities for millennials have thrown an unsteady light on the future of the traditional office. As more offices stay empty, building owners have to consider that their properties have a diminishing return on investment, even as developers plan for future projects.
Projections for the market hint at a continued downward trend.
While downtown office properties saw a 10% increase in total collections and a 2.9% decrease in median net operating costs, the suburban market remained relatively stagnant, according to The Institute of Real Estate Management's income analysis reports. Suburban office total collections remained virtually unchanged at $19.76/SF, a 0.1% decrease, while median net operating costs fell 2.6%.
Though downtown properties report higher revenue than their suburban counterparts, their total operating costs are higher, rendering their median operating ratio, the total operating costs against total revenue, at 0.45. This is higher than the suburbs' 0.43 ratio.
Vacancy rates this year have remained steady in downtown markets, at an average of 8%, and have increased only 1% in suburban markets to 5%. Taxes and janitorial/maintenance costs have remained the costliest expenses in both suburban and urban markets.
How the office submarket will fare over the next few years remains an open question, as a number of factors could have a significant impact on future growth.
Space Utilization and Economic/Job Growth
Many white-collar and professional jobs can be performed remotely, at least part of the time. Combined with the increasing popularity of co-working and shared office space concepts, efforts among businesses to reduce their usable square footage per tenant have led to less demand.
Steady growth in employment as the country moves past the Great Recession should increase office occupancy. But diminished labor supplies and a lack of available affordable housing for millennials have made it difficult for companies to hire talent without also increasing wages. This could slow the rise of business confidence and temper occupancy growth in the future.
The pace of new office completions is projected to increase toward the end of 2017 and throughout 2018. Whether the new inventor will meet shifting office demand or drive vacancy rates higher remains to be seen.
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