Watch List: Investors Who Bought High-Vacancy Office Properties See Big Pay-Off - CoStar Group

Investing in high-vacancy office properties has always involved a lot of risk. That is no more true than in today's market as more companies adopt more-efficient floorplans that allocate fewer square feet per employee. 

However, recent research found that investors who did brave the odds and acquired high-vacancy office properties in this economic-recovery cycle have enjoyed superb returns. In general, value gains from acquiring low-occupancy office property, leasing it up, and selling have averaged 33% during this cycle versus just 20% in average value gains for the same strategy during the last one.

The research also found that office property in central business districts (CBDs) generated slightly more of these gains than suburban assets, as office users have shown a stronger preference for urban over suburban locations up to this point in the cycle.

The CoStar Portfolio Strategy team examined 44 million square feet of office buildings that sold after successfully executing an occupancy turnaround over the past 12 years. These turnaround buildings were defined as those that were initially acquired with occupancies below 70% and then resold one to four years following the initial sale with an occupancy improvement of at least 25 percentage points. The office buildings had to be 10,000 square feet or larger with an initial sale price of $5 million or more. 

"The decline in cap rates has certainly provided more of a tailwind for office property values this cycle than was the case for the last one. However, the outsized value gains realized more likely reflect the greater volatility in rent during this cycle, especially in urban areas. Non-CBD submarkets in recent years have narrowed the gap in delivering appreciation returns, which suggests a better risk discount for non-CBD properties than previously available."

However, the window for successfully executing such a strategy may be closing. Rent gains are expected slow this year for office space as new supply ramps up. As that happens, any additional reward for holding onto assets may not outweigh the heightened risk posed by new supply.