By Q4 2024, the vacancy rates of offices in the MSCI U.S. Quarterly Property Index reached a record high of 19.7%. Despite such weakness there remain pockets of strong demand for high quality, well-located assets.[1] Such a backdrop suggests significant redevelopment activity may be necessary in the coming years to reposition assets to meet occupiers’ evolving demands.
Historical evidence shows that office developments have delivered stronger outperformance relative to stabilized strategies, but the best results have come from explicit strategies to acquire assets for development, carry out the development and sell relatively quickly. Developing assets purchased for other reasons — and, particularly, holding on to the completed asset — was less successful, raising questions about whether the incumbent owner is always the best candidate to turn an asset around.
Finding an effective measure
Traditional real-estate performance measurement often relies on time-weighted returns, which can have limitations when assessing the performance of individual investments, particularly developments or other value-added strategies where cash flow is uneven over time. Public-market-equivalent (PME) analysis offers an alternative approach by benchmarking property-level returns against a public index.[2]
The PME is a measure of relative performance expressed as a multiple and accounts for the timing of cash flows over the life of an investment, making it more effective at measuring investments with irregular capital inflows and outflows, such as developments and other repositioning strategies. A PME above 1 indicates outperformance relative to the reference index, while a result below 1 suggests underperformance.
In this analysis, we use private property indexes rather than a public one. We compute the PME of 13,703 properties relative to each asset’s respective returns index (by property type and metro) in the MSCI U.S. Quarterly Property Index. We then segment the results based on property type, the owner’s strategy at purchase, and decisions regarding development and exit strategies.
Crises created entry points for longer-term outperformance
The timing of office acquisitions played a key role in asset performance relative to that of offices in the same metro area. In our analysis of 2,339 U.S. office assets, properties acquired during periods of heightened market stress — when asset values came under pressure or vacancy rates peaked — tended to generate stronger PMEs.
Acquisitions made during or shortly after market downturns — such as in the early 2000s and in 2012, after the global financial crisis — delivered higher PMEs, reinforcing the importance of entry pricing in enabling long-term value creation. Conversely, poor vintages coincided with periods of low vacancy, robust price growth and strong deal volumes, where investors were more likely to overpay for assets. For instance, from 2004 to 2007, office PME declined from 1.09 to 0.87, reflecting the challenges of investing during peak market conditions. PME exceeded 1 again only in 2012, when vacancy rates were at their highest and deal volumes were subdued.
Offices acquired close to vacancy peaks produced higher PMEs
Active management was rewarded in offices
Unlike the other main property types, offices acquired for the purpose of development outperformed stabilized assets, illustrating the value that can be unlocked with active strategies. Office developments and redevelopments recorded PMEs of 1.24 and 1.23, respectively, while stabilized office assets had a lower PME of 1.06 relative to their property-type benchmark in the MSCI U.S. Quarterly Property Index, across all assets, strategies and vintages since 1999. Retail and industrial developments didn’t show the same outperformance against their respective property-type benchmarks, and instead it was stabilized assets in these segments that provided the best PMEs.
Office developments outperformed stabilized property
Development execution drove higher returns
Purposeful execution also mattered for office-development success, the analysis indicates. Office properties identified for development from the point of acquisition, and then successfully developed, delivered a PME of 1.23, compared to 1.01 for properties not developed as envisaged at the time of acquisition. Assets initially acquired in a stabilized state and developed as an afterthought or out of necessity later in their life cycle yielded a PME of 0.94 compared to 1.06 on non-developed, stabilized assets.
There was a wide range of outcomes among individual assets, with PMEs for offices acquired for development and executed ranging from 0.70 at the 10th percentile to 1.82 at the 90th. Notably, the downside risk for developments was not significantly different from the lower ranges of PMEs for stabilized assets acquired and then subjected to normal market forces. This suggests that while development carries execution risk, its lower-bound performance outcomes have, in some cases, been comparable to those of stabilized office assets operating under prevailing market conditions.
Assets purchased for development tend to have some problem that needs to be fixed and are generally purchased at a discount to valuation, which helps protect the downside even if planned developments aren’t executed. This contrasts with stabilized strategies that may be more fully priced with limited upside given higher occupancy, but retaining the downside of potentially losing tenants.
Higher PMEs for offices acquired for development and executed
Additional outperformance was evident in cases where offices were identified for development, successfully developed and subsequently sold, but the timeliness of the sale was critical. Offices that were acquired for development with execution and exit within three years generated a PME of 1.31. While the multiple dropped to 1.21 for exits of three to five years and 1.11 for exits of five to 10 years, it was higher than that generated by the other property types over similar periods.
While property’s individual outcomes varied, realizing returns of completed developments through exits resulted in better returns, on average, reinforcing the importance of development execution and a well-coordinated exit strategy in office investments.
Timely exits unlocked additional return in offices developed and sold
PME analysis could help investors find office’s alpha
While the office-property market continues to evolve amid structural challenges, PME analysis shows that a wait-and-see approach has typically not been the route to outperforming the broader real-estate market. Instead, returns-enhancing opportunities are more likely to be found in pursuing development at the outset and timing exits well.