The first rule of investing is diversification. Traditional real estate investors seeking passive returns most often look to Single Tenant, free standing retail, often via a ground lease. Another viable asset class does exist but is frequently over looked by the typical retail NNN investor; Single Tenant Office. Though net lease office investments may seem more risky than their retail counterparts, well located properties in central markets offer a high level of performance.

Compared to the passive returns an investor makes from a typical retail ground lease transaction, Office is typically sold in Fee Simple. This allows the purchaser to depreciate the structure, adding an additional tax benefit for the investor. Office space also tends to be a higher quality physical asset with more versatility for future use than free standing retail. Should the term run out and the tenant choose not to exercise their renewal options, the owner may find a tenant looking for 80% occupancy. The Owner may then be able to improve their profit margins by re-leasing the smaller available spaces (say 5000sf or less) either to other offices, or retail operations such as a sandwich shop or a bank branch on the ground floor for higher return rates. This versatility is commonly overlooked but is of great importance. Well located office buildings are often better able to respond to a tenant vacancy than net lease retail.

Office Leases tend to be shorter in duration than those typical to net lease retail. Though this may not initially appeal to investors who prefer long term leases, in theory, this allows more frequent adjustments to be made to reflect the demands in the market place. In-fact as we have recently seen, widespread tenant-owner lease renegotiation is quite common. With the economy’s fickle nature, it may be beneficial for investors to have some assets in their portfolio unencumbered by long term leases.

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