The office sector has experienced a decrease in capital allocations due to various factors. Currently, it accounts for 22% of the NCREIF Property Index (NPI), which is significantly lower than its peak of 37% in 2015.
According to a recent report from CBRE, this decline in the office sector is not just cyclical but also secular. Even before the impact of COVID-19, multifamily and industrial properties were gaining more prominence within the NPI at the expense of office spaces. This shift can be attributed to fund managers recognizing 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. This is evident from how steady their contribution has been compared to their actual share of buildings in the index.
However, this isn’t an unprecedented situation for offices as they have previously fallen out of favor during oversupply periods such as those seen in late 1980s and early 1990s. Despite this setback, there was eventually a boom driven by emerging tech companies and renewed interest from investors looking into commercial real estate opportunities.
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CBRE predicts that until fundamentals improve and prices adjust accordingly, we can expect subdued levels for offices’ share within NPI’s portfolio allocation mix. Furthermore, it will likely be focused on prime assets located strategically within high-performing submarkets with potential for strong returns.
