Densification and increased capex are eating away at office returns across the country, but West Coast office properties are a better bet for office investors than New York City assets, according to a report by Danny Ismail, lead analyst for Newport Beach, California–based Green Street Advisors’ office-sector research, which was distributed by a representative of the firm.
The report says revenue per square foot for Manhattan office properties is expected to remain flat through 2022, while that of West Los Angeles and San Francisco properties is expected to continue rising and remain higher than Manhattan’s through that time period.
According to the report, “In New York City, WeWork is now the largest office tenant. WeWork tends to operate more densely than traditional office companies. While New York has experienced elevated supply growth relative to recent history, it is the shadow supply from densification and office reconfiguration that is having a bigger impact. As a result, New York reported flat net rent growth over the last year, and likely will not see healthy net rent growth over the next few years as job growth gets offset by tenants taking less space.”
The report also says that Green Street favors the West Coast gateway office markets of San Francisco, West Los Angeles, and Seattle, “where tech-related job growth has been a significant driver of commercial real estate returns this cycle. These West Coast markets are expected to have some of the best growth in fundamentals over the next few years.”
Going further, the report says these West Coast markets “benefit from steep barriers to new supply. In San Francisco, Proposition M places an artificial limitation on the amount of new office space that can be constructed in the city each year. West L.A. is a very difficult market in which to build new commercial properties due to terrible traffic and deeply-held nimbyism.”
In addition, Sun Belt markets including Atlanta; Austin, Texas; Nashville; and Charlotte, North Carolina, are expected to outperform other markets, the report says, “since they are bolstered by strong demographic trends and expansion plans on the part of major employers.”