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The Real Estate Pivot of 2023

Some folks contemplating office conversion

Many things have seemingly returned to normal in the aftermath of the pandemic. Restaurants are bustling again with patrons. Domestic and international travel has increased significantly. Even theatres are making a comeback. But despite these shifts back to normalcy, the preference for remote work persists. And as a result, there remains a tremendous amount of office space sitting idle in many large cities. While many landlords and real estate holders hoped this would resolve on its own, it clearly has not. The U.S. office market overview continues to suggest different solutions are needed. And the one that’s getting the most attention involves various office conversion models.

(Bold has written extensively about the shift to remote work–read one of those stories here.)

Some numbers floating around tall buildings, representing office conversion
What will 2023 hold for real estate? A lot of office conversion to compensate for empty spaces.

According to recent surveys, roughly 20-40% of office space is unused in various cities across the nation. Efforts to revamp the space into something more attractive is not easy and is often quite costly. At the same time, creating shared workspaces or rotating schedules for use has proven challenging also. But that doesn’t mean such options as well as others are feasible and realistic. They simply require a more dedicated efforts and sometimes the full attention of an intervening company. Interestingly, this is precisely what is happening within the office conversion industry. And it’s these companies that are changing the U.S. office market overview in the current real estate climate.

“The challenge is that nobody has figured out how to reuse those massive, million-square-foot, ’80s-era office buildings. We need to take this functionally obsolete product that’s still in an amazing location and figure out how to not lose that value.” – Tracy Hadden Loh, Fellow at the Brookings Institution

Barriers to Office Conversion

As office spaces have sat empty now for months, landlords have certainly considered their options. Many have sought to convert their spaces into more attractive and in-demand real estate spaces. However, in many cities, strict code and zoning laws prevent them from making such transitions possible. As such, many have tried to attract retailers to their locations, especially those with good curb appeal. But here too, there are issues. Not only did remote work leave behind commercial building spaces but also foot traffic as well. Many retailers are therefore not that interested in locations where many commercial buildings exist. This is the basic issue with the U.S. office market overview currently.

At the same time, landlords and commercial building owners also face cost and economic barriers with office conversion. Supply chains disruptions and resource scarcity continue to drive up construction material costs. Therefore, office renovations of any kind are generally not cheap. These same building owners also face rising interest rates as well as inflationary pressures on potential tenants. Not only does office space supply exceed demand, but fewer and fewer tenants are interested in long-term leases. All of these factors involving the U.S. office market overview are negatively impacting potential office conversion and lease options.

(Take a dive into the “friend-shoring” concept and how it applies to outsourced labor in this Bold story.)

“Given the situation with rising interest rates, the economic climate and the cost of construction, it’s a big challenge. There’s a lot of risk out there.” – Brian Strawberry, Chief Economist, FMI Consulting

Innovative Office Conversion Solutions

Fortunately, for landlords and owners, help is available. Several companies and startups are offering a different U.S. office market overview based on different uses of space. While office spaces may not be ideal for apartment conversions and retail, they still have alternative value. For example, Silofit is a company that helps turn office spaces into gyms and workout venues. Specifically, they facilitate office conversion efforts that attract personal trainers and their clients. Neighbor is the name of another startup that provides a peer-to-peer storage platform. In the last year alone, they saw the amount of office spaces being used for storage quadruple in volume. These reflect some of the unique approaches different companies are pursuing to help alleviate vacant office space surpluses.

Some dudes discussing the U.S. office market overview
The U.S. office market overview involves transformation–will these transformations be for the better?

While these ideas are certainly intriguing, one of the more unique strategies to office conversion belongs to another company. Backlot, a location services company for film and television productions, has seen significant growth. In essence, Backlot manages over 22 million square feet of office space in New York for various commercial buildings. These spaces include offices, restaurants and retail spaces. It then seeks out film and television companies in need of authentic locations for shooting. Not only does Backlot connect landlords and filming crews. But they also prep the space, negotiate the deal, and management the details. With the boom in content demand overall, they have seen their services increase substantially. And as a result, they have helped shift the overall U.S. office market overview into something more creative.

“When you shoot scenes for shows like ‘Billions’ or ‘Succession,’ it’s not just about the one room. It’s really about the authenticity of the environment.” – Darren Goldberg, Managing Partner and Head of Acquisitions, Backlot

A Real Estate Market in Transition

As part of the U.S. office market overview today, there are still efforts to utilize office space as it was intended. Many still hope that workforces will eventually migrate back to offices to enhance collaboration and creativity. But all bets are off when trying to predict if and when such events take place. Companies like Codi are hedging their bets by trying to make office spaces more flexible and appealing to hybrid workers. Based on San Francisco and New York, Codi offers tenants time-share options that are highly flexible in a weekly basis. They also allow shorter lease terms and faster turnarounds also. For some landlords, this is a better way to go than a costly office conversion.

Some dudes exchanging a key for the sake of office conversion
Office conversion will involve transforming vacant spaces into… well, anything.

This approach does have inherent appeal, and Codi saw a 40% growth last year as a result of real estate trends. In this regard, solutions that allow more efficient use of office spaces do have merit. But long-term, it may well be that the glut of office spaces currently will demand a more lasting remedy. Without question, things are changing in commercial real estate in the wake of the pandemic. And it seems clear that the U.S. office market overview won’t ever look the same again.

 

Sometimes businesses are like rose bushes, and need to be pruned to grow. Read more about prune and grow, and Musk’s use of it, in this Bold story.

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