Page 29 - IreitEbook

Those are the most obvious considerations here, but you’ll also want to

assess other aspects such as building quality (i.e., construction specifics and
materials used), mechanical and structural elements, and if the location(s) in

question feature any in-building amenities such as gyms or eateries. Basically,
is a REIT building or acquiring high-end or lower-end properties? Class A,

Class B, or Class C?
Newer buildings are typically classified as Class-A holdings, whereas

older, non-updated, and/or less visually attractive structures fall into the
Class-B or Class-C categories. Since the terms “older,” “non-updated” and “less

visually attractive” can be subjective terms depending on the exact location,
take all that into account while evaluating an office REIT.

As a general rule, however, the classification system offers a helpful
step in better understanding these trusts and how they do business.

When it comes to their lease structures, office REITs most often work
with full-service agreements, meaning that they’re responsible for the

properties’ entire operating expenses, from landscaping to real estate taxes to
insurance.

At first glance, that might make office REITs sound unattractive to
buy into at any time. But most of them include built-in financial clauses that

account for those additional fees throughout the contracted term (which
typically start out at five or seven years). In addition, office leases commonly

come with annual rent escalations known as bumps or step-ups to protect
them from rising inflation.

Based on those new details, office REITs could sound intensely and
consistently attractive. Keep in mind, however, how cyclical they are in nature

due to the human tendency to go overboard with the good stuff. Oversupply
inevitably turns office space into a buyer’s market, forcing related REITs

to compete with each other over price points, thereby driving down their
profitability.

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