What Office Can Learn from Industrial: 3 Ways to Boost Asset Class Performance

Office-centric real estate portfolios are grappling with challenges in regaining their pre-COVID valuations, largely due to persistent high vacancy rates. In contrast, the industrial sector is flourishing, with demand so strong that in 2020 JLL projected a need for an additional 1 billion square feet by 2026. 

Historically, office spaces have been highly profitable, primarily due to their desirable locations and distinctive exteriors. However, as the industrial sector experiences a boom—driven by e-commerce growth and the rising importance of logistics centers—it’s clear that office property owners and operators could benefit from taking a few lessons from this thriving asset class.

How Are Office and Industrial Different?

Office Real Estate: Focused on Tenant Comfort

Office spaces have traditionally been all about tenant comfort. The appeal lies in exterior design, prime locations near transit hubs, and modern amenities such as on-site gyms, cafeterias, and high-end security features. 

Property managers in office settings often play dual roles, combining administrative duties with hospitality, akin to business concierges. However, these properties are largely interchangeable, with the main differentiator being location and amenities.

Industrial Real Estate: Driven by Operational Necessity

On the other hand, industrial properties may not have the curb appeal of office buildings, but they are crucial to the operations of their tenants. Whether it’s a warehouse full of products or a manufacturing plant, these buildings are embedded into the tenant’s business processes. 

The stakes are high; even minor disruptions can significantly impact a tenant’s bottom line. As a result, property managers in industrial settings are less about hospitality and more about becoming essential partners who understand and facilitate their tenants’ operations.

Lesson 1: Stop Counting on CAM Revenue

Common area maintenance (CAM) fees have long been a reliable revenue stream for office property owners. However, with rising vacancy rates, these fees have become less dependable. 

Additionally, the practice of passing operational costs onto tenants has fostered inefficiencies. In contrast, industrial tenants are acutely aware of their operational costs and are not inclined to tolerate surprise fees.

Actionable Insight:

Office owners should prioritize reducing administrative overhead by adopting more efficient, digital-first processes. Offering self-serve tools and apps can free up property managers to focus on enhancing the tenant experience rather than finding opportunities for surcharges. This shift not only improves tenant satisfaction but also helps streamline operations, leading to cost savings.

Lesson 2: Adapt Buildings to Changing Tenant Needs

While industrial buildings might look similar on the outside, they are often highly customized on the inside to meet the specific needs of each tenant. This adaptability has been key to the industrial sector’s success.

Actionable Insight:

Office property owners have the opportunity to rethink their spaces. While the return to pre-COVID office occupancy levels may be unlikely, there are still opportunities to specialize. For example, the life sciences and medical office sector has emerged as a distinct class, with properties designed to support biotech, pharmaceutical, and research facilities. 

By understanding local market needs, office owners can tailor spaces for specific business types, making them mission-critical rather than interchangeable.

Another avenue worth exploring is the conversion of office spaces into residential units, a trend gaining traction in cities like Boston. Although complex and costly, such conversions could rejuvenate urban centers and, in turn, benefit other asset classes like retail and mixed-use developments.

Lesson 3: Prepare for Growth Without Bloat

The industrial sector has seen rapid growth, with some portfolios doubling in size within a year or two. Despite this expansion, the emphasis has remained on maintaining lean operations.

While residential asset classes with property managers on site like Multifamily have been championing centralization for years, Industrial has increasingly relied on new technologies to operate with fewer staff but without sacrificing tenant support.

AI and automation tools focused on real estate business needs are addressing a growing number of needs, from lease abstraction, to accounts payable automation, to utility usage management. 

Actionable Insight:

For office portfolios to grow sustainably, operational efficiency must be at the forefront. By implementing tech solutions like AI-powered automation to reduce manual processes, office owners can manage an expanding portfolio without proportionately increasing payroll. This approach ensures that net operating income grows alongside the portfolio, rather than being eroded by rising costs.

At first glance, office and industrial real estate might seem worlds apart, but there are valuable lessons to be learned. By adopting some of the strategies that have fueled Industrial’s success—like reducing reliance on CAM revenue, adapting to tenant needs, and growing efficiently—office property owners can better position themselves for a strong recovery and future growth.