Garden-Style Office Outperform Traditional Assets in 2020

Office leasing has come to an abrupt halt during the pandemic, but some office properties have been spared. Low-density, low-rise properties have continued to see leasing traction this year. Harbor Associates’ garden-style property Bungalows Del Mar is among the lucky. The property has re-opened after a significant renovation and leased to health care, medical, financial services and technology tenants.

“Garden-style projects by their physical construction are conducive to leasing in a COVID and post COVID market,” Rich McEvoy, a principal at Harbor, tells GlobeSt.com. “These projects are typically low rise with stairwells as opposed to elevators, include exterior walkways, direct tenant entries accessed from the outside and abundant open air. In today’s world tenants are more comfortable in these settings than traditional high-rise buildings.”

Smaller apartment properties in suburban markets have been leaders in leasing activity, outperforming traditional assets. “Garden-style assets are usually located in the suburbs and prior to COVID we saw a trend emerging of tenants looking for suburban office space,” says McEvoy. “The average millennial is roughly 30 years old and living in a downtown environment may not be as appealing as it was three to five years ago. We think COVID accelerated a push to the suburbs that has been underway for the past 24 months.”

Bungalows Del Mar fits in this category. The 39,000-square-foot property is located in the Del Mar suburb of San Diego. As a result of the stable demand and leasing activity, Harbor believes that the property will be stabilized by the end of the first quarter.

Despite the success of this property, there are some challenges securing debt for value-add office opportunities in this market. Harbor is still actively investing, but is focusing on core-plus assets. “Capital market participants are taking a wait and see approach with office especially value add projects where debt is difficult to attain and there is uncertainty as to when tenants will return to the office,” says McEvoy. “We continue to source new acquisition opportunities with a focus on core plus assets with in place tenancy and lease term and are looking to acquire $250 million throughout California and Colorado over the next 24 months. We expect some great buying opportunities to emerge over the next 12 months.”

The distribution of a vaccine—which started this week—has given Harbor assurance that the recovery is around the corner. “We’re optimistic that once a vaccine becomes widely distributed office tenants that have been delaying leasing decisions will re-engage with the markets,” says McEvoy.