Thread by @XanderSnyderX

Thread on #office buildings:

Office remains the asset class with the least certain future. However, not all office space is created equal. For example, life science office is in a steadier position since lab work generally can't be performed remotely. 1/n

Given persistent demand to lease life science office space, occupancy rates in this specialized asset class remain quite high. As one data point, Alexandria Real Estate, a publicly traded REIT that specializes in life science office space, reported... 2/n

...occupancy rates of 95% in their North American properties in 2Q of this year: sec.gov/ix?doc=/Archiv…

Another way to compare subcategories of office assets urban or central business district (CBD) vs suburban locations. Historically... 3/n

...annual price growth for CBD office has tended to outpace that of suburban. However, after the onset of the pandemic, price growth at suburban locations quickly overtook CBD price growth. As remote work became more prevalent, people moved to the suburbs. 4/n

Demand for suburban office space grew in part when employers began to realize that to get some employees back into the office they would need to move the office closer to them.

In recent months, suburban office price growth has decelerated... 5/n

...and is now equal to annual CBD price growth. It's worth keeping in mind, though, that current annual price growth is relative to suburban office's higher prices last year.

Lower office price growth is a consequence of declining suburban office trading activity, which can be seen in August's transaction volume.

Notice also that for most of the last 20 years investor preference for suburban and CBD space was... 6/n

...roughly equivalent, in terms of dollars transacted. However, following the pandemic, transaction volume for suburban office overtook that of CBD, creating a gap between the two that persists today. That is, investors continue to prefer... 7/n

...suburban offices over CBD offices.

While the above chart clearly shows that a gap has opened between suburban and CBD office transaction volume, it's doesn't clearly show how strong this preference today is relative to the past. We can get a sense... 8/n

...of how much buyers are preferring suburban locations to CBD locations by looking at the gap in transaction volume between the two. 9/n

Think of the orange line as the relative preference of investors to suburban office locations over CBD office locations. The green line traces today's gap value back in time for 20 years so you can compare today's it to prior values. 10/n

Today's transaction volume gap is ~$3.0 bn, which represents the 81st percentile of gap values over the last 20 years. Translated into non-wonk: investors preference for suburban office over CBD office is higher today... 11/n

...than it has been for most of the last 20 years (81% of the last 20 years, to be precise).

Despite slower suburban office price growth, investors are still indicating a clear preference for suburban office locations relative to CBD locations. 12/n

#economics #commercialrealestate #realestate #realestateeconomics #realestateinvesting #officespace #FutureOfEcon #remotework #lifescience #FirstAmEcon #cre