The economic downturn adversely impacted an already overbuilt office market. The muted demand for office space was also a function of a decade-long trend from telecommuting. The recovering economy, however, along with a germinating reversal in telecommuting, may lead the way for a reversal in the outlook for office properties.
Recently, two major companies, Yahoo and Best Buy, announced a reversal of the their telecommuting policies. The TeleWork Research Network estimates that 3.1 million workers currently consider home to be their primary work place (excluding self-employed individuals and volunteers). This is up from 73 percent when compared to 2005. At 200 square feet of office space per employee, telecommuters negate the need for 6.2 million square feet of offices. The latest estimate of the total U.S. office market is 12 billion
square feet http://www.sandiego.edu/pipeline/documents/EstimatingOfficeSpaceRequirementsMay12012.pdf
Since 2000, the average annual return for office properties held in tax-free investment portfolios (both cash flow and property value changes) has been 7.92 percent. For the 12-months ending December 2013 it was 9.52 percent.
The data for this analysis comes from the National Council of Real Estate Investment Fiduciaries (NCREIF), which is a non-profit trade association for tax-exempt investors (such as pension funds) in real estate managed by fiduciaries. NCREIF reports accurate, unbiased return metrics, with a framework in place that assures consistency over time and across investors. To read more about NCREIF click http://www.ncreif.org/index.aspx
NCREIF’s return assumptions include:
- Properties are acquired through all-cash transaction (no loans)
- Since the returns are within tax-free investments, no taxes are paid (except property taxes). There are no long-term gains taxed at the time of sale, and the investors do not depreciate the property.
- Returns are calculated quarterly and include both the net-cash flow from the property and the change in the property value. Specifically, total return is the net operating income from the property, less property management fees, plus the change in value.
For details and related questions click http://www.ncreif.org/faqsproperty.aspx
Within the NCREIF space, more than 7,000 commercial properties are tracked with a combined market value of $353.9 billion. This data series is recognized as a top proxy for U.S. commercial real estate returns and performance.
The annualized trailing 12-month office returns are included in the following table since 2000, and in the graph commencing 2002.
While many cities have office vacancy rates in the double digits, percentage wise, much of the vacant property is economically and physically obsolete.
Coming up in the next blog – hotel property returns.
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