First, it was COVID. Then, just when we started to get a little momentum back in the investor sales office sector, interest rates ballooned. The mantra became, “Survive until 2025,” not dissimilar to past cycles.
Earlier this month, the calendar flipped and it’s 2025, but did anything change?
In fact, it did, but is it enough? There are major shifts occurring, both nationally and locally, that signal good news ahead for office investors.
One of the world’s largest online retailers not only announced the return to five days per week in the office but then announced that they didn’t have enough space to accommodate their headcount.
AT&T, Sweetgreen and others followed suit and said they wanted their employees back in the office. According to JLL’s U.S. Office Market Dynamics Q4 2024 report, approximately 21% of Fortune 100 companies are fully five days a week and office attendance nationally is averaging 3.5 to 4 days a week.
Locally, New Jersey announced the Round 4 numbers for Affordable Housing and provided municipalities with a bonus for the redevelopment of office and retail buildings. Every affordable unit that’s part of a redevelopment will be counted as 1.5, lowering the municipality’s overall requirement significantly. Redevelopment of office buildings will shrink the market, lower the vacancy by lowering the denominator, and make our market healthier by removing antiquated buildings.
With increased demand and shrinking inventory, we are clearly headed in the right direction. One investor asked me if it was finally time to buy suburban office buildings.
My reply was simple: “Only if you want to make a lot of money.”
However, there’s one critical component that needs to change before we see office investors come back to the table in earnest. The availability and cost of debt is still prohibitive to many investors and significantly impacts the value of buildings overall. When you consider that debt typically makes up 60 – 65% of the capital stack, expensive debt lowers the returns for investors. That said, many lenders are a fast “no” on office completely. It’s a herd mentality and no one wants to make a mistake.
A friend recently said, “debt is temporary, but basis is forever.” I have repeated it countless times because he’s right. Once the lenders start realizing that we are in the midst of “The Great Basis Reset,” as coined by Mike McDonald, JLL’s co-leader of the national office group, hopefully the herd mentality will shift and they will open up to lending on office.
Indeed, we survived. With so many factors in our favor, it’s truly time for office investors to thrive. With lender cooperation, everyone can win as we head into the next cycle.
Jeremy Neuer is a senior managing director at JLL Capital Markets.