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 a decline from its peak of 37% in 2015.
According to a recent report by CBRE, this decline is not solely cyclical but also secular. This means that even before the impact of COVID-19, multifamily and industrial properties were gaining more prominence in 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 portfolio. Evidence for this can be seen through office’s contribution to market value being steadier than its share of actual buildings within the index.
This is not an unfamiliar situation for the office sector as it has previously fallen out of favor during oversupply periods such as those seen in late 1980s and early 1990s. However, this was followed by an upswing driven by emerging tech companies and renewed interest from investors.
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CBRE predicts that until fundamentals improve and pricing adjusts, there will continue to be subdued levels of investment allocated towards offices within NPI. Additionally, any investments made are likely focused on prime assets located in top-performing submarkets with potential for strong returns.
