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How to invest in the office sector and reap the rewards

Over the past year, my firm and others have committed hundreds of billions of dollars to acquire office properties across the country. Over the years and decades, these deals have hardly raised any eyebrows – the office sector has been a stalwart of the commercial real estate industry, with urban trophy properties guaranteed to generate steady returns for skilled investors.

Yet since the start of the pandemic, even the most high-profile property in the financially affluent, fast-growing cities have been shrouded by a cloud of uncertainty in the office sector. To the untrained eye, this is understandable, as the rise of remote working and permanent behavioral change among workers has irreversibly changed the sector.

The area is now at a major inflection point, however, as the pandemic continues to rage and occupancy rates continue to rise across the country. While many have fled the past two years, those who had the courage to capitalize on the industry’s downturn – as well as the skills to adapt it to a new era of work – are poised to capture incredible upside.

For the past 36 years, the focus of CP Group’s business model has been our ability to generate value in office buildings. Historically, one of the ways we do this is by running major repositioning campaigns that turn our acquisitions into attractive investments for our equity partners.

However, the concept of “value-added” has taken on a whole new meaning for office assets after the pandemic. Many of the features that make a building desirable – a prime location in a dynamic neighborhood, architectural significance, large windows and in-house amenities such as restaurants, cafes and gyms – have evolved with tenant and worker preferences, and the need for office operators. Will adjust accordingly.

As tenants continue to return to these buildings, many people are less concerned with elevated lobbies than highly flexible spaces that can be quickly and easily replaced in response to any type of disruption—whether their business, the preferences or markets of their employees. Similarly, many workers are more likely to find value in facilities geared toward accommodating their changing lifestyles.

For example, many working parents may prefer a daycare facility that now occupies ground-floor retail space, rather than more traditional options such as a banking center or cafe.

Both the tenant and investment community are promoting the adoption of green and ESG-related initiatives in office buildings, as more and more major operators are helping to reduce carbon emissions, invest in safer and more clean environments, and promote occupants Committed to playing a more active role. ‘Physical and mental health.

While savvy investors and owner-operators know that these features will generate value in a big way as the office sector continues to rebound, location — like all real estate — remains important.

Our investment thesis has always been predicated on positive migration and other demographic trends in what we call the “Smile States,” stretching from the Southeast to Western markets such as Texas, Arizona and Colorado. The pandemic poured gasoline on a dynamic that shows no signs of slowing down, even as we resume our way of past lives.

In Florida alone, out-of-state companies ranging from private equity and major investment banks to tech firms like Microsoft and Apple have announced plans to establish a presence in the Sunshine State.

As occupancy rates continue to rise across the country and public health guidelines recognize COVID-19 as more endemic, these areas are uniquely positioned to generate real value for those who remain active in the region. Investors devoted capital toward the perceived more stagnant waters of industrial or multifamily over the past two years, but rapidly rising interest rate spreads, rising costs and supply issues now cause them to re-examine the office’s lack of exposure. are.

For those willing to bet on the many vacant and neglected office buildings, their faith is on the verge of being rewarded. Absorption rates are accelerating across the country – especially in the Southeast and Southwest – both largely spared from the massive lockdowns and other COVID-related regulations that still exist in many gateway markets .

Any major disruption – be it a market bubble or a once-in-a-century global pandemic – ultimately creates clear winners and losers. The office sector has faced historic levels of unpredictability and whirlwind market changes over the past two years, even as investors and even many owners have fled. Firms that have doubled down on the recognition of the right assets that can successfully adapt to a new era in both our economy and work culture – are now ready to reap the rewards.

Angelo Bianco serves as a managing partner with the national office investment and operating firm CP Group.

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