Danny Ismail, office analyst at Green Street Advisors, participated in a video interview at Nareit’s REITworld: 2018 Annual Conference in San Francisco.
Ismail said that to understand Green Street’s outlook for weak office returns, it is important to look at the cost of assets, the cost of asset maintenance, and the kind of growth that is expected.
“In the office sector, you’re generally paying a pretty low, nominal cap rate for an office asset, so your starting initial yield is generally pretty skinny,” he said. “On top of that, the capex needed to maintain an office asset is pretty high.”
Ismail said that Green Street looks at the true cost of property ownership over time, and that in the office sector, that includes tenant concessions and regular maintenance costs.
“From that perspective, office is a pretty tough business. Green Street believes that the capex load in the office sector is among the highest in its property universe,” he said.
Regarding rising capex burdens in the office sector, Ismail said it’s important to ask what you need to put into a property in order to keep it competitive over the long term.
Ismail said that the tech sector continues to be a bright spot within the office sector. “The amount of tech companies that still want to locate in the city of San Francisco continues to be high,” he said, adding that Nashville, Austin, and Atlanta are also thriving.
Ismail also said that coworking companies have had a lot of success the past few years, noting that WeWork did not exist 10 years ago, but today is the largest private tenant in Manhattan.