The office sector has seen a decrease in capital allocations due to various factors. Currently, it makes up 22% of the NCREIF Property Index (NPI), which is a decline from its peak of 37% in 2015.
According to a recent report by CBRE, this decline is not just cyclical but also secular. This means that even before the impact of COVID-19, multifamily and industrial properties were gaining more traction at the expense of office spaces. This shift can be attributed to fund managers who have recognized better growth prospects in these sectors.
CBRE also suggests that there may have been a rebalancing towards higher-value properties within the NPI’s office portfolios. Evidence for this can be seen in how much value these properties contribute to the overall market value compared to their actual representation within the index.
This is not new territory for offices as they have previously fallen out of favor during times like late 1980s and early 1990s when oversupply led to an expensive bust period. However, things turned around with an emerging tech sector and renewed interest from investors leading into a boom phase during late ’90s according CBRE.
Insert capital allocations chart
Looking ahead, CBRE predicts that until fundamentals improve and pricing adjusts accordingly, we will continue seeing subdued levels for office share within NPI data sets . In addition , prime assets located in strong submarkets are likely going remain weighted heavily as they are positioned well for potential outperformance opportunities.
