By Cadie Crean, Confluent Development
What might be perceived as a “contrarian” approach to office reflects our ability to identify opportunities amid market inefficiency. While some hesitate to invest in properties during uncertain times, Confluent Development concentrates on generating real estate returns while mitigating risk through downside protection. By deploying an acquisition strategy focused on properties with untapped potential, investors can strategically position themselves to outperform as the market stabilizes.
Confluent Development is committed to a multi-market office acquisition strategy, capitalizing on temporary market inefficiencies to benefit from outsized returns. We target durable office buildings in sustainable U.S. markets for above-market returns with downside protection. As a firm, we recognize the importance of adaptability and see an opportunity to take a contrarian perspective rooted in disciplined underwriting. Durable office buildings offer efficiency and flexibility, catering to various tenancies without compromising essential attributes.
Despite the headwinds facing investors such as tight labor markets, high interest rates, and rising vacancy rates, opportunities exist to acquire high-quality office buildings at a substantial discount to replacement cost. Our latest acquisition of ParkRidge Six, located in Lone Tree, which we closed on December 29, 2023, exemplifies our strategy. We capitalize on market discrepancies and demonstrate a unique foresight in seizing undervalued assets.
Setting the Stage
Tight labor market conditions favor the workforce. With the U.S. unemployment rate consistently below 5% since September 2021, and over 4.3 million people voluntarily quitting their jobs in December 2021, the labor market has drastically shifted. Historically, this level of attrition signified a competitive employment landscape. Employers must now offer competitive compensation, benefits, paid time off, and an appealing culture to attract and retain talent. Flexibility has emerged as a crucial factor in this employment arms race.
During COVID-19, companies adapted out of necessity as the workforce was trapped at home. We all faced an onslaught of Zoom meeting after Zoom meeting after Zoom happy hour! The removal of an hour-long commute to and from the office added time for new hobbies, quality time with family and friends, and less burnout. The desire for a flexible work environment is here to stay, but that doesn’t mean that office is dead.
There still needs to be a place where companies come together and solidify their culture through in-person interactions allowing team members to collaborate, learn, and grow. Heads-down work can be done at home, but culture is best established with space to freely converse with your colleagues about your weekend plans or your last family trip. Office space provides a location for culture to cultivate and for relationships to form and flourish. This makes the type of office that employers select to call home more important than ever.
As workplace norms evolve, so do the demands of office spaces. Workplace norms have shifted over the years from massive Mad Men-style offices with solid doors, and solid walls, large enough to fit couches and bars inside to bench seating and hoteling where no one has an office and you pick where you want to set up each morning, including the executives. Factors such as daylighting, ceiling height, flexible floor plans, mixed-use environments, and outdoor space have become crucial considerations. Achieving a level of sustainability is particularly viewed as a major positive, alongside proximity to transit, parking, restaurants and retail options. Landlords must adapt to these changes, offering modern amenities and dynamic environments to meet occupier’s needs.
That said, there will be some losers in the coming years. For some buildings today, free isn’t cheap enough due to functional obsolescence, upside-down real estate values and reduced occupancy across the market. The high-interest rate market creates downward pressure on real estate values, in turn slowing transaction volumes due to decreased demand, and as a result price discovery becomes more elusive. The time of near-zero interest rates is a thing of the past, and borrowers are just hoping to return to historical norms when U.S. Treasury rates ranged from 3% to 6%. In some buildings, interest rates can’t correct enough to make the asset accretive moving forward. While market analysts indicate the Federal Reserve is done raising rates for now, there is no indication we’ll be seeing a sharp cut in rates anytime soon. In addition, election years typically inject volatility into the market, keeping investors on the sidelines.
Embracing Change
Historically, during the time between rate hikes and before rate cuts, there is a window of opportunity. Investors with long-term mindsets can find attractive opportunities to step off the sidelines and benefit from outsized returns. Embracing shifting market conditions and focusing on durable assets in growth markets can lead to strategic acquisitions that outperform the market in the long term. Despite headwinds like shifting workplace norms, tight labor markets, and high-interest rates, we believe office is ripe with opportunity.
Cadie Crean is a development director leading Confluent Development’s office and Industrial development platforms. Cadie holds a M.S. in Real Estate Construction Management and a BSBA from the University of Denver where she played all four years on the Division I Women’s Soccer team. She is a member of the University of Denver Alumni Engagement Committee, DMCAR, and ULI Colorado: Office Workplace & Industrial Council.
