Why invest in office real estate?
Office real estate has been popular with investors over the years because of its solid characteristics. Income is provided to investors through the collection of rents from the tenants and office buildings are generally situated in attractive locations with strong underlying real estate fundamentals.
Office tenants generally sign longer leases than those commonly seen in residential real estate, which provides income security to the owners of the premises. Longer leases provide business continuity to the tenant and the high costs of an office fit out can make moving prohibitively expensive. Leases in office real estate often also have built in annual rental increases, meaning the rent grows over time.
The yields associated with office property are also generally higher than those we see in residential real estate. Commercial properties typically offer rental yields between 5% and 7%, compared to residential properties which typically offer yields of around 2-4%. This results in commercial office investments being more likely to generate greater income returns than residential investment properties1.
There has been some speculation on the future of office due to enforced work from home policies resulting from the impacts of COVID-19. If COVID-19 has taught us anything, it is that humans enjoy and require social interaction, and it is becoming increasingly apparent that many tenants recognise productivity that results from in-person collaboration cannot be replicated virtually. Additionally, employee isolation has a detrimental impact on an organisation’s culture and staff wellbeing. The office remains key to a business’ ability to generate ideas, execute strategies and engage with their workforce.
- Real Commercial: A complete guide to commercial vs residential property investment, 22 March 2021
