Think office: The evolution of office investment opportunities
The U.S. office market is undergoing several structural changes, including the evolution of flexible office space as well as the importance of amenities and wellness, to the risk of obsolescence for buildings failing to keep up with changing tenant preferences. We expect sustainability-driven office properties with ‘creative’ buildouts located in markets with strong demographic tailwinds to out-perform the overall U.S. office investable universe. Further, we expect the life sciences and medical office sub‑sectors to out-perform traditional office, buoyed by funding growth in the medical and biotechnology sectors as well as overall healthcare demand.
What factors drive office out-performance?
In our view, outperforming offices need to be:
- Located in cities with robust demographic underpinnings
- Modern, in order to reduce the amount of cap-ex spend which will be required for the current stock of obsolete office
- In touch with what the future workforce will want in terms of highly amenitized, flexible office space
- Sustainability focused
People, people, people
In the U.S., we identified 35 cities, which are known as Nuveen Real Estate’s ‘tomorrow’s world cities’. We believe these cities are positioned to out-perform the U.S. overall in the coming decades given their strong economic and demographic growth prospects as well as their outstanding ability to innovate while also providing residents a high quality of life. Historically, offices in our ‘tomorrow’s world cities’ have outperformed U.S. offices overall (Fig. 1).
Within the 35 ‘tomorrow’s world cities’, we have further identified 21 cities best positioned specifically for office investment (Fig. 2).
Our analysis suggests a strong correlation between strong working-age (25-45) population growth and income growth to office rent growth (Fig. 3). These tailwinds are crucial for office demand, so targeting these cities should position investors for out-performance.