How The ‘Amazon Effect’ Is Impacting The Office Sector

Amazon's push to conquer the retail industry is inadvertently impacting office real estate.

While office REIT yields have not declined, they have remained flat throughout the year, averaging 1.85% in returns year-to-date. This number seems particularly low when compared to data center REITs' 28% yield and infrastructure REITs' 24.4% in returns year-to-date.

“We’ve seen some slowing in the office market. Q3 numbers that are just coming in for net absorption and completion [were] positive but slowed in the third quarter and it’s the slowest since the beginning of 2016," NAREIT Senior Vice President, Research and Economic Analysis Calvin Schnure said.

Amazon has aided in the cooling of the sector by providing services that encourage immediate gratification, flexibility and convenience among shoppers. That expectation has transcended the retail industry and permeated the office sector, impacting where people choose to work.

The result has been an increase in the popularity of modern mixed-use developments and a move away from the traditional, older suburban office park.

“Part of what’s going on in the office market is some of the cities have had a bit weaker growth in the landmark industries. In New York in 2016, the financial industry had very little net gain in financial jobs, and that’s a very important industry there. Similarly, in San Francisco the tech business had much slower job growth and that had been driving a lot of the demand for office space,” Schnure said.

But despite the slight pullback in leasing activity, Schnure does not believe the office REIT sector has anything to worry about long term.

“The office market overall has been posting moderately good returns. There’s been reasonable rent growth, reasonable price appreciation. I think the office market has a perfectly good outlook.”

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