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What is the future for the office sector in commercial real estate?

Office assets have been a sure thing in commercial real estate for a long time and considered a reliable source of revenue for owners and lenders. However, since the pandemic the future of the office sector in commercial real estate is unclear. While industrial assets saw the biggest increase in demand and production over the past few years, the office sector remains uncertain. Now that the Covid-19 National Emergency is officially over it is time to return to the office. Yet, during the pandemic companies and employees were forced to adjust workplace environments and work from home or remotely; and for many, this business model is more attractive and convenient than commuting to an office 5-days a week. According to Jessica Morin, CBRE Americas Head of Office Research, “employees have become accustomed to the flexibility and autonomy that hybrid work provides, and many associate it with improved sentiment toward work.” Employers are struggling to increase office utilization and attendance in a competitive labor market.

In many instances it is coming down to creating an environment with upscale amenities and building technologies that attract workers back to the office. A smaller footprint with upgraded office space seems to be the direction the office sector is shifting to in the current marketplace. Morin also believes, “overall, the combination between smaller footprints and a flight to quality will leave the U.S. office market with a surplus of vacant and undesirable office inventory. Outdated office space will continue to weigh on the market until rents are reduced enough to entice tenants to absorb some of the space, or the buildings are demolished or converted to an alternative use.”

Another solution looming is converting office to residential which could potentially be a multipurpose solution for some markets that are also struggling with affordable housing. According to Green Street’s March 6 Commercial Property Price Index report, “office real estate values have dropped by 25% in the past 12 months.” Several office-owning REITs, including Boston Properties and Vornado Realty Trust, were given negative rating outlooks S&P Global Ratings,

According to the Bisnow article, Office Landlords To U.S. Government: Without Help, We’re Heading For A Financial Catastrophe, “For the first two years after the outbreak of the pandemic, so little was known about its long-term impact on the office market that lenders and borrowers alike were all too happy to reach extension deals and other short-term measures, hoping to wait out the tough times. As a result, $270B in commercial real estate debt is scheduled to mature in 2023 — an all-time record, credit monitoring firm Trepp reports. Office buildings account for $80B, or around 30%, of this year’s maturities. The pandemic’s one-two punch of causing office demand to collapse and creating a mass maturity event has backed regional banks into a corner.”

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Also, here is a National Office Report by Commercial Edge,

It is important to have annual building assessments on all your buildings including office assets to determine the structural integrity of the building. In addition, implementing a seismic retrofit while repurposing a building is optimal time during renovations. Be prepared and have regular inspections to assess the seismic risks of your commercial industrial real estate assets,

Posted Under: Commercial Real Estate