The first rule of investing is diversification. Traditional realestate investors seeking passive returns most often look to SingleTenant, free standing retail, often via a ground lease. Anotherviable asset class does exist but is frequently over looked by thetypical retail NNN investor; Single Tenant Office. Though net leaseoffice investments may seem more risky than their retailcounterparts, well located properties in central markets offer ahigh level of performance.

Compared to the passive returns an investor makes from a typicalretail ground lease transaction, Office is typically sold in FeeSimple. This allows the purchaser to depreciate the structure,adding an additional tax benefit for the investor. Officespace also tends to be a higher quality physical asset withmore versatility for future use than free standingretail. Should the term run out and the tenant choose not toexercise their renewal options, the owner may find a tenant lookingfor 80% occupancy. The Owner may then be able to improve theirprofit margins by re-leasing the smaller available spaces (say5000sf or less) either to other offices, or retail operations suchas a sandwich shop or a bank branch on the ground floor for higherreturn rates. This versatility is commonly overlooked but is ofgreat importance. Well located office buildings are often betterable to respond to a tenant vacancy than net lease retail.

Office Leases tend to be shorter in duration than those typicalto net lease retail. Though this may not initially appeal toinvestors who prefer long term leases, in theory, this allows morefrequent adjustments to be made to reflect the demands in themarket place. In-fact as we have recently seen, widespreadtenant-owner lease renegotiation is quite common. With theeconomy’s fickle nature, it may be beneficial for investors to havesome assets in their portfolio unencumbered by long termleases.

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