Major investment opportunities in office assets currently exist in the nation’s leading secondary cities where there is little transaction volume or buyer appetite. In these cities, leading buildings can be acquired for “reasonable” capitalization rates of 8% or better, as compared to the aggressive rates of 6% and below seen in select cities such as New York and San Francisco.

A cyclical downturn in commercial real estate enables a fundamental value investor to acquire assets at sensible valuations. The hard economic times are exposing those owners who overpaid for assets, lack the acumen to adequately manage the asset, and are in financial trouble. Many lack the capital to fund the requisite tenant improvements and brokerage fees to increase occupancies.

Target secondary cities that have one or more of the following attributes: A) economic growth potential; B) venture capital investments; C) high profit-margin industries and S&P 500 companies in the tenant base; D) elite educational institutions, E) existing or expanding public transportation, F) global trade route presence; and G) barriers to new construction. Notably, these attributes are key features of the few office investment markets that have witnessed a rebound in valuations.

Being aggressive with an early move on the office asset class, but paying very low valuations, creates a solid defensive play for the days forthcoming when inflation and cap rates are increasing.

Your rental rate projections should start at levels below the already decimated rental rates of any given market. Be sure to conduct a segment valuation of the proposed assets utilizing different risk premiums for the existing tenant leases and prospective tenant leases. Office assets, correctly priced, can provide the growth and valuation margins necessary for the upcoming decade of higher interest rates and cap rates.