Because office employment in secondary markets is rapidly increasing, demand for office space is driving investor interest in those markets. Residents are seeking lower rents, while investors hope for higher yields and more product availability. Outlying markets offer much more available office product at a lower rate.
For example, Olive Hill Group strategically acquired an office property, The Courtyard, located in the Culver City submarket of Los Angeles, to capitalize on the growth of the tech-focused tenants in nearby Silicon Beach. By transforming that asset into a creative office space, we met the demands of emerging tech start-up companies and provided an alternative to the more expensive offices in Playa Vista.
According to a report by CBRE, investor appetite for assets in secondary markets has continued to increase for the fourth consecutive year. By acquiring office space in these gateway markets, investors obtain the same quality product and tenants at a lower cost, higher returns and better cap rates.
Many major metropolitan areas are still experiencing high levels of construction, which may eventually lower rents and reinstate the balance of supply and demand. While investors certainly need to be aware of the shift occurring, certain core markets will likely remain unaffected.
That said, office investors that focus on emerging submarkets will have an easier time finding attractive investment opportunities and won’t be impacted by the oversaturation we see in some urban cores. The office sector overall remains a strong contender for investors, and we project that secondary markets will continue to gain traction through 2018.