Repurposing Office Space
Strategies for office space repositioning
The COVID-19 pandemic has transformed the way we work and brought about a shift towards hybrid work models. This shift has resulted in a significant change in the office real estate sector, with rising interest rates and anemic demand putting office owners in a challenging position. Even industry stalwarts such as Columbia Property Trust and a subsidiary of Brookfield Asset Management have recently defaulted on buildings in their portfolio. According to a report by Cushman & Wakefield (C&W), “Obsolescence Equals Opportunity,” an unprecedented imbalance in supply and demand will result in an excess of 330 million square feet of vacant office space by the end of the decade, in addition to the 740 million square feet of structural or “normal” vacancy found in the office sector. C&W predicts that by 2030, office vacancies will exceed pre-pandemic levels by approximately 55%.
Given this scenario, numerous office owners will need to reevaluate their properties and determine how best to move forward. The C&W report offers several concepts for office owners to consider. The first step is for owners to determine whether their building is encountering competitive obsolescence or structural obsolescence. If a property is facing competitive obsolescence, it may be a candidate to reposition the asset up the value curve and appeal to tenants who are still active in the market. Alternatively, a property may be functionally obsolete, meaning that it’s no longer suited to being utilized as a contemporary office property. In either case, property owners have options.
Repositioning Strategies A property is generally a good candidate for repositioning if it’s in a market where office tenants are actively seeking space in highly amenitized, new, or recently refurbished buildings. Owners may consider enhancing common spaces, including lobbies or parking; upgrading building systems such as HVAC or elevators; or adding amenities. Understanding which of these improvements will have the most impact on a given property will involve a thorough competitive analysis of office properties within the specific market or submarket. Engaging with project management professionals early in the process can help owners determine project costs. These costs should then be overlaid with an analysis of the rents that will be achievable in the market once the project is complete. Further, owners should work with workplace strategy and property management experts to create a strong sense of place and maximize opportunities for experience, such as common outdoor areas.
Repurposing Opportunities Some properties will not be strong candidates for repositioning, either due to the property’s competitive landscape or due to the building’s physical characteristics. In those instances, office property can be evaluated for repurposing opportunities. This might entail converting some or the entirety of the building to another use such as multifamily, life sciences, or medical office.
Multifamily Conversions Converting an office into a multifamily has a historical precedent. Following the stock market crash of the late 1980s, when office vacancies in New York City exceeded 15%, space in approximately 60 properties was converted into more than 12,000 multifamily units. However, most of those properties were of an older vintage than the 1970s and 1980s stock that’s prevalent in many cities’ urban cores today. Consequently, they tended to have smaller floorplates, which made them more suited to multifamily conversion. Office buildings typically have larger floorplates, making it difficult to bring natural light into the core of a building. Other architectural elements can make an office-to-multifamily conversion challenging, such as the shape of the physical structure, façade, ceiling heights, window placement, and more. In terms of costs, estimates vary widely, from approximately $100 per square foot to nearly $700 per square foot. The higher costs will be borne by properties that need capital-intensive projects, such as entirely new façades,
As the hybrid work paradigm continues, it’s clear that the office sector is going to need to evolve. The Cushman & Wakefield report suggests that an unprecedented imbalance in supply and demand will result in an excess of 330 million square feet of vacant office space by the end of the decade. This presents a challenge for office owners, but it also offers an opportunity to reposition or repurpose their properties.
Owners will need to evaluate whether their building is encountering competitive obsolescence or structural obsolescence. If the building is encountering competitive obsolescence, then repositioning the asset up the value curve is the way to go. Improvements may include enhancements to common spaces, structural upgrades to building systems, or the addition of amenities. Owners will need to engage with project management professionals early in the process to determine project costs and overlay the costs with an analysis of the rents that will be achievable in the market once the project is complete.
If the building is encountering structural obsolescence, then repurposing the building may be necessary. This might entail converting some or the entirety of the building to another use such as multifamily, life sciences, medical office, or mixed-use. These conversions can be complex and costly, but they can be viable in specific circumstances.
Repositioning and repurposing strategies can revitalize outdated office properties, making them appealing to tenants and investors alike. Finding the right strategy for each particular property and market is key. With the help of the right professionals and experts, property owners can turn challenging situations into opportunities for growth and success.