Evaluating Locations for Office Property Investments

In evaluating locations for office property investments within an urban area investors should be looking for office cluster locations with prospects for development-driven increases in locational demand for office space.  Such increases in office space demand will occur when nearby or more distant developments in the environment of a given office cluster improve its attractiveness vis a vis competing office locations within the urban area, thus inducing increases in demand for office space at that location. In trying to identify what types of urban development projects may trigger increases in locational demand for office space, we need to think about the kind of developments that will increase the utility of a location to office firms. Obviously, improvements in locational attributes valued by office firms should increase a location’s utility to such firms. Therefore, one can argue that the following developments should trigger increases in locational demand for office space (see Figure below)

Developments that Can Trigger Increases in Location Demand for Office Space

Office location demand

a) Improvement of nearby access to basic business support activities
This could happen in the case of significant commercial/retail development in a cluster poorly served by business support activities.

b) Improvement of location access to business concentrations
A location’s access to business concentrations could improve due to major transportation projects that make business concentrations within the metropolitan area more easily accessible from the location under consideration, or due to ongoing developments of new office clusters at a reasonable distance from the location under consideration.

c) Improvement of location access to labor
Significant improvements of a commercial node’s accessibility to a large pool of workers should increase considerably its attractiveness to office firms and trigger increases in location demand for office space. These demand increases should in turn translate to rent increases, if there is no excess supply. Significant improvement of the accessibility of an office cluster to labor could occur through the development of a nearby light transit rail station, the construction of new major transportation arteries that improve considerably its general access to the area, or intensive residential developments in areas around the cluster.

 d) Improvement of airport access
A location’s access to an airport could improve either due to major transportation projects that will provide easier access to the airport, or due to the construction of an airport at a location easily accessible from the location under consideration by the existing transportation infrastructure. It is obvious that the construction of a new airport could be a big value-increase driver for locations that gain convenient access to it and investors seeking big-profit opportunities should closely monitor any announcements relevant to such developments. However, it should be noted that very close proximity might not be desirable because it may have a negative effect on values due to the noise associated with airport operations.

e) Improvement of prestige and visibility of location
Improvement of the prestige and visibility of an office cluster may occur due to new developments and additions of high quality, high-rise modern office buildings, high-profile professional and commercial firms, and prestigious support facilities.

f) Improvement of access to amenable residential communities
Improvement of the access of an office cluster to amenable residential areas can occur through new major transportation improvements in the area. Also, suburban commercial-space clusters in areas where high-quality residential development is relatively light will gain improved access if new amenable residential communities are developed at a short driving distance.

From this discussion, it is clear that, supply conditions allowing, office locations with potential for big-value increases include existing office-space concentrations about to improve considerably their general access to residential communities and business concentrations within the urban area, as well as expanding clusters about to become more comprehensive and diversified in terms of the range of support services they provide. Finally, office clusters on the verge of transformations that will boost considerably their prestige and visibility are also good candidates for high-return investments.

Notice that improvements in locational advantages need to be strong enough to upgrade the location significantly in terms of its comparative advantages vis as vis other competing office concentrations, in order to result in considerable increases in demand for office space. For example, if competing office clusters increase their locational advantages to the same extent, or more, then improvement of locational advantages at a given cluster may not result in increases in location demand. However, it is unlikely that all office clusters in an urban area will benefit equally from major transportation and urban/suburban development projects going on in the area.

Within this context, identifying office space clusters that have potential for strong development-driven demand increases involves the following steps:

    1. Identify major on-going and planned developments in the urban area
    1. Identify office clusters that stand to experience the greatest improvements in their locational attributes from such developments
    1. Evaluate how the landscape of comparative advantages across clusters will change
    1. Evaluate how changes in comparative advantages among the different concentrations within the urban area will affect the flows of new office-space demand across the different locations
    1. Identify emerging new leaders of the urban office landscape, if any
  1. Verify that the clusters identified as the most likely beneficiaries of upcoming strong increases in office-space demand have a low vacancy rate and are expected to add very little new space to their inventory in the next couple of years

Author: Petros Sivitanides, Ph.D.

Dr. Sivitanides is a seasoned expert in real estate investment strategy and analysis, property portfolio modeling and strategic analysis, and real estate market research and econometric forecasting with over 16 years of experience with leading global real estate investment managers and real estate consultants (CBRE Global Investors, AXA Real Estate, Torto Wheaton Research, DTZ, etc.). He is the editor of the textbook titled “Market Analysis for Real Estate”, which has been used as the main textbook for a graduate course at Harvard University. He is also the author of the book "Real Estate Investing for Double-Digit Returns" and many widely quoted articles that have been published in popular real estate journals. Currently, he is the Head of the Real Estate Department at Neapolis University in Cyprus, and an international real estate consultant.

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