Nuveen Real Estate Report Lays Out Opportunities for Resilient Office Investment

We recently released a research report titled “Think Office: The evolution of office investment opportunities,” which examines structural changes at play in the U.S. office market. Nuveen Real Estate is owned by parent company TIAA and is a top five global real estate investment manager.

The report highlights four essential factors we recommend office investors keep top-of-mind.

Location: We have identified 21 cities best positioned for office investment that include “gateway cities” such as New York and Los Angeles as well as “growth cities” such as Seattle, Denver and Charlotte. These cities account for over 80 percent of all U.S. office transactions, and their inclusion is based in part on a strong correlation between robust working-age (25-45), population growth and income growth to office rent growth.

“These tailwinds are crucial for office demand,” the report states, “so targeting these cities should position investors for out-performance.”

Modernity: Office capital expenditures (cap-ex) are a significant portion of net operating income due to workers’ desire for more modern and sustainable office space and amenities. The massive expenditures for office re-builds have led to unprecedented demolitions and tenant improvements. Therefore, core investors should seek out assets that have already completed this transition, as they can be expected to outperform their markets.

Flexibility: Flexible office space is still in demand, albeit in a more measured fashion than the rapid growth of prior years. The proliferation of coworking concepts has revealed that many tenants are interested in shorter-term leases and highly amenitized space. This creates an opportunity for office investors as, according to CBRE (CBRE)’s 2018 Americas Occupier Survey, 85 percent of real estate executives plan to implement flexible-office solutions into their portfolio strategy.

Sustainability: “Real estate investors have a growing demand for sustainable buildings and investing responsibly is becoming a ‘must have’ in investment criteria,” according to the report. “High-performing, energy-efficient, and healthy buildings not only reduce operating costs, but enhance business productivity through occupant well-being and attracts tenants by offering a cutting-edge workplace experience.” We have determined that “office buildings with higher Energy Star ratings have produced higher total returns since 2008.”

The report also touches on how all these changes have altered the relationship between office landlord and tenant, making it more of a partnership, and how this has required landlords to become more tech-savvy.

“Technology is a key driver of ‘user experience,’ a concept that has been recently adopted from the tech industry as offices have shifted toward more of a service-led, B2C offering,” reads the report, which also acknowledges the acceptance of the term “smart building” as “one that enables tenants to build out their own smart workplace strategies and optimize their office space for productivity, talent attraction and retention.”

This changes the role of the traditional office landlord, who now needs to act as more of a partner to their tenants.

“Overall, the operation of offices is becoming increasingly important to creating real estate value, with more specialist expertise needed to cater to tenant needs that are both broader and changing faster than ever before, particularly in technology.”

The report also notes that office investors should consider investments within the life sciences and medical office sectors. The life sciences sector is currently “benefitting from record high R&D funding, a favorable regulatory environment, a strong R&D pipeline and technology advances from genetics to telemedicine,” while medical office is burnished by factors including that “health care is the fastest growing sector in the U.S. economy.” As a result, these two sectors have “boasted stronger occupancy and lower levels of cap-ex relative to traditional office market in recent years,” allowing them to offer “higher risk-adjusted expected returns.”

“In our view,” the report concludes, “compelling investment opportunities are in modern, sustainably focused office properties located in markets with strong demographic tailwinds. Undeniably, numerous resilient office opportunities will be present for investors in tomorrow’s world.”

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This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or investment strategy and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, differing levels of government regulations and tax implications in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic, or other developments. Past performance is no guarantee of future results.

Nuveen Real Estate is a real estate investment management holding company owned by Teachers Insurance and Annuity Association of America (TIAA). Nuveen Real Estate securities products distributed in North America are advised by UK regulated subsidiaries or Nuveen Alternatives Advisors, LLC, a registered investment advisor and wholly owned subsidiary of TIAA, and distributed by Nuveen Securities, LLC, Member of FINRA and SIPC. Nuveen, LLC (‘Nuveen’) provides investment advice and portfolio management services through TIAA and over a dozen affiliated registered investment advisers. Nuveen Real Estate is an investment affiliate of Nuveen. Nuveen provides investment advisory solutions through its investment specialists.