Office Real Estate 

We started our journey in the office real estate sector back in 1997 when we acquired our first office building from a fund, specifically one of the teachers' insurance funds that had foreclosed on it from a prior owner who the firm happened to know. 


This marked the beginning of our extensive learning process about everything it takes to successfully run an office building from soup to nuts. Every asset class has its own specialties, but more than 30 years of experience has taught us that the office sector is very capital intensive and long-term; it is not the ideal place for compounding and growing your money as we often discuss.

However, there is a unique opportunity in office real estate for making a substantial value add on your investment quickly. This can be achieved by acquiring a building that is, for example, a distressed deal with 50% vacant provided one has a solid business plan to lease up the remaining space. 


There is a saying that captures the essence of ownership across different asset classes: "Office owners eat well; residential and industrial owners sleep well." Reflecting on our experiences, where we have lost a lot of sleep over stressful situations in office real estate, we now prefer ventures that allow us to sleep well.

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Office Ownership Characteristics

Office properties initially seemed like great investments due to their potential for high returns through leasing and refurbishments. However, reality hits when an owner faces tenant turnover—it costs a lot of money to not only find new tenants but also to tailor spaces according to their specifications.


The changing nature of how offices are used became even more evident post-Covid-19 pandemic. The shift towards remote working highlighted the fragility of depending solely on physical office spaces for returns on investment.


A memorable part of our journey was purchasing one of Newark's largest office buildings around mid-2000s. It was ideally situated with excellent connectivity, serving as a gateway for the entire Northeast rail system from Boston to DC and housed premium tenants like New Jersey's largest law firm and Prudential Insurance among others. Buying this building felt like we had finally 'made it,' considering it such an achievement and trophy asset that we never thought we would sell.


Yet realities such as economic incentives leading significant tenants like Prudential Insurance planning relocation forced us to rethink strategies and adapt quickly including renewing leases under favorable conditions despite threats from some tenants potentially moving out.

Office Sector Dynamics

We have seen various dynamics play out in the office sector, ranging from investments in multi-tenant buildings to handling sizable leases with single tenants. 


Moving through this landscape has provided us with an array of experiences that contribute towards our understanding and strategy towards office real estate investment. For instance, managing a building where one tenant occupies 50% of the space presents a substantial risk exposure. Such scenarios highlight the importance of diversification within office property portfolios.


Office Real Estate Lives On

We like own office buildings that are situated in what we believe to be fantastic locations, places where people would not easily decide to leave because there is still a need for office spaces. 


In the years immediately post Covid, a narrative emerged suggesting the office market was plummeting with 20% of buildings being empty, but if looking at it from another perspective, this meant 80% were still occupied. 


This sector is far from extinct; it is very much alive. Yes, there were and are properties turning into 'zombie buildings' due to overleveraging and shifts in how these spaces are utilized. What needed to happen was an adjustment period where property values found a new equilibrium within the market. 


We foresee significant opportunities for making profits in the office sector in the period to 2034.

Understanding Market History

Reflecting on the past can provide valuable insights into current trends. For instance, back in the mid-1990’s following the Savings and Loan real estate downturn, statistics indicated San Francisco had enough vacant office space to satisfy two decades of demand. Despite these predictions, development did not halt; new buildings were constructed as technological advancements and emerging businesses necessitated additional spaces.


Fast forward to today's context with developments like artificial intelligence potentially reducing the requirement for physical office spaces – it is vital that our understanding and utilization of such spaces continuously evolve at the same time.


Our focus has also extended towards sectors like multifamily housing and industrial properties because some activities cannot transition online or into the ‘cloud'. For instance, one cannot sleep or physically store items in a digital space—at least not with our current technology capabilities.

Co-Working Remains Relevant

In discussing specific assets within our portfolio, we have observed that co-working spaces maintain their relevance as professionals seek alternatives to working from home full-time. People need environments conducive for collaboration outside their household settings. Our holdings include buildings leased by Regus—a co-working company—located adjacent to industrial parks we own which complement each other by providing incubation spaces for businesses looking to expand.


Another notable asset is an office building located downtown Bozeman, Montana; despite being older and classified as a "B" building, its position in an irreplaceable downtown location makes it attractive especially for state government tenants and local businesses desiring proximity to downtown amenities. It boils down to discernment regarding valuation—understanding why certain locations retain their appeal despite broader market trends affecting traditional office use patterns.


Pay Close Attention to Demographics

Despite having been successful in the office space investment area ourselves, we acknowledge there are many office properties we would not touch although someone else might find them profitable. This highlights another aspect of investing; knowing who you are as an investor along with your risk profile. 


By 2024, investors could acquire office buildings for pennies on the dollar and possibly see their value double by doing virtually nothing but maintaining them for five years. Yet this strategy may not suit everyone due to its contrarian nature which often requires a specific mindset and investor base that is not easily convinced on such an approach especially considering banks' reluctance towards lending for such ventures.


The most powerful force in real estate is demographics - understanding where people are growing and moving towards ensures success because swimming against this tide can be exhausting even though it might potentially offer higher returns. Hence why we have learned throughout our careers that sometimes taking the easier path or following demographic trends can prove more beneficial.

The Ever-Present Specter of Work-From-Home

One cannot really discuss developments in the office space without talking about the impact of work from home. What work from home really means for investors is that we are functionally seeing a jump in the supply of additional office space that people have expanded into. This is a problem because too much supply of anything is going to bring down the price of anything. 


This brings us to an interesting point. Everyone calls it "work from home," but work from home is essentially an office category; it takes up space. People build an office in their home, so the more people are working from home, the less space they need in a traditional office setting. It results in more supply and then reduces demand in one specific location.


We are witnessing a significant shift here and we do not yet have any idea yet how this is going to play out long term. This situation constitutes a macro movement that is unfolding in real-time but doing so slowly, and its effects on how the next generation will utilize office space remain uncertain.

What to Look for in an Office Deal

As for what characteristics would make Heritage Capital interested if a deal lands on our desks? Well, it certainly needs to be in a good location - one with reasons for its existence and compelling enough for people to travel there. There must be ample parking available and access to public transportation suited to its market context. Additionally, financial viability plays a critical role – acquiring the asset at such a price where profitability seems plausible right from the start.


Ideally speaking, finding an asset that is perhaps 50-60% occupied presents an opportunity — provided there is realistic potential (and strategy) not only envision but practically achieve occupancy rates close to 90%, without cost requirements being astronomical.


And once this level is reached or nears completion you have got to have strategies set forth either selling off or maintaining sustainability because long-term ownership beyond five years adds layers of unpredictability into investment dynamics—something most investors might find overly risky depending upon personal risk appetites.

The Bottom Line

Our journey in the office real estate sector, spanning over three decades, has been a transformative learning experience. From acquiring our first office building in 1997 to managing a wide variety of diverse office spaces, we have a wealth of first-hand insights derived from decades in the business.


While office real estate can be capital-intensive and long-term, it offers unique opportunities for substantial value addition and profit generation through strategic acquisitions, leasing, and management. However, the changing nature of office spaces, particularly in the post-Covid-19 era, has highlighted the importance of adaptability and diversification within office property portfolios.


Our experiences have taught us the significance of understanding market dynamics, making informed purchases, and avoiding over-leveraging. We have also learned to recognize the potential in various types of office spaces, such as medical office buildings, data centers, and government-leased properties, each presenting distinct challenges and opportunities.


While the long-term effects of WFH remain uncertain, we believe that the keys to success in office real estate investment lie in acquiring properties at the right value, in the right locations, and with the right strategies for occupancy and profitability.


Portrait - Jeff Greenberg

Jeffrey Greenberg

Founder and Managing Partner

Jeff has over 30 years and cumulatively over $2 billion investment experience in commercial real estate for his 3rd generation family office.

'The best way to make money in real estate,' he says, 'is to make it slowly.'

While having a focus on mid-large size, Class A/B industrial facilities across the United States, Jeff invests in opportunities that provide ongoing income with the likelihood of doubling investor capital over time.