Hi, this is Victor Gutierrez, Vice President of Operations at Ten-X with this week’s Market Minute. Today I want to provide you some insight into what we’re seeing in the office market. We’ve all seen the negative headlines and have likely personally been impacted by the shifts in the way office space is used.

The office market faces headwinds. Office attendance looks to be stabilizing around 50% of February 2020 levels. Office-using job growth is slowing to less than 500,000 this year following three years of 1,000,000-plus office-using jobs created. And finally, the tenant demand that does exist, is leasing smaller space, with the average lease size being 22% less than that of 2019.

Despite these challenges, there is still demand for office buildings. This year we’ve sold 97 office buildings. When we categorize these as stabilized, value-add, and opportunistic investments, we get a better view into what investors want to buy. Of the three categories, we are seeing value-add investments sell the best, followed by opportunistic and lastly stabilized properties.

Why are value-add deals more in demand? Well, they have more risk-adjusted upside. These properties are still cash-flow positive, showing a tenant demand that supports the continued operation as an office building. This continued operation is questionable with opportunistic transactions.

This cash flow provides a bit of safety while allowing the investor to establish and execute a value creation business plan. This plan can include improving amenities, making the building more energy efficient, or modernizing common areas to better retain existing tenants or attract new tenants.

I believe that although the office market is still yet to stabilize, investors buying well-located office buildings today, at reset costs basis’, will be well suited to poach the fewer available office-using tenants from overleveraged or capital-restricted owners. What is viewed today as a risky investment, will likely be looked back upon as a great buying opportunity.

Let us know if you agree. Thank you, and stay tuned for our next Market Minute.