Selecting Markets and Locations for Office Property Investments

locations for office property investments

Selecting markets and locations for office property investments the smart way means identifying metropolitan areas that have the best prospects for experiencing office rent increases. Such metropolitan markets are those that have low office vacancy rates and are expected to register strong growth in office employment, which should result in strong growth in office space demand and rents.  Once such markets are identified then property investors should focus on properties located within established office concentrations with the greatest comparative advantages in terms of a number of  locational attributes which are discussed below.

 

Choosing Locations for Office Property Investments

Market-driven increases in locational demand for office space will occur in markets where employment in office sectors is expected to grow rapidly. Which locations will capture such increases in demand? I would argue that the strongest and most advantageous locations are more likely to be the major beneficiaries of such demand increases. Thus, locations that have a comparative advantage in terms of satisfying the locational requirements of office firms are more likely to feel the greatest pressure from new demand and register the strongest price increases (assuming that there is no oversupply). Based on the discussion of the previous subsection, it appears that productivity and cost reduction are the primary concerns of office firms when choosing locations. In particular, office firms value the following locational characteristics:

a) Close access to basic business support activities
Close access to facilities that can provide services typically sought by the firms in support of their business activities, or by employees during working hours, such as banking, basic business services, restaurants, and shopping can help reduce the time costs of accommodating such needs and increase firm productivity.

b) Access to client base
Good access to residential areas is valued especially by firms providing services mostly to households rather than businesses. Also, areas that are poorly served by competitors provide opportunities for capturing untapped market demand and increasing a firm’s market share. In this sense, businesses may find commercial space in poorly served areas attractive.

b) Access to business service concentrations
Since linkages play an important role in firm location choice, office firms should value access to business concentrations because it reduces the cost of interpersonal contacts with their clients, business associates, or input providers. The effect of this factor, however, may have been weakening, due to advances in information and telecommunication technologies. In a study of rental rates paid by office firms in the Los Angeles area, Sivitanidou (1997) presents evidence showing that the importance of access to business service centers may have been decreasing through time.

c) Access to labor
Surveys cited earlier indicate that office firms value access to labor because it may reduce the time and cost of their labor searches. Furthermore, it may reduce the cost of wages, since workers living close to their workplace may be willing to accept lower wages. Office firms may seek central-city and CBD locations if specialized labor is dispersed, while suburban locations may be sought if labor skills are clustered in the suburbs.

d) Freeway and airport access
Good freeway access should render firms more productive because it will reduce the time and costs of business trips at any destination within the market they operate. Proximity to freeways and freeway junctions should also be valued by firms, as it provides greater access to labor and potential customers over a larger geographic area. Good airport access is becoming increasingly important, due to the globalization of business activity and the resultant need for increased air travel. Within this context, improvement of a location in terms of these access advantages should contribute to greater firm productivity, potentially greater revenues, and lower costs.

e) Prestige and visibility
Location prestige and visibility are especially important for high profile firms and corporate headquarters. Usually, downtown locations or prestigious suburban nodes are the preferred locations of these types of firms.

f) Access to amenable residential communities
Firms should value locations with good access to high-quality residential communities, with low crime rates and high levels of amenities and public services, for two reasons. First, they provide access to an upper-income client base. Second, they provide good access to skilled labor, thereby reducing labor search costs. Good access to amenable residential areas becomes more important for firms employing a higher proportion of managerial labor.

Office clusters that have comparative advantages in terms of these characteristics may be the ones to attract the bulk of new office space demand as the area and its economy grows.

 

References

Sivitanidou, Rena, 1997. “Are Center Access Advantages Weakening? The Case of Office-Commercial Markets,” Journal of Urban Economics, 42(1), 79-97.

 

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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