Recently, the Urban Land Institute (ULI) and PwC compiled a report based on the insights of several real estate professionals — including investors, fund managers, developers, brokers and consultants — that seeks to predict the shape of the real estate sector following the pandemic.
The consensus seems to be that, despite some signs of returning to “normal,” significant changes are unavoidable. Specifically, the report explores how the way we work — and, more important, how we use the spaces we inhabit to conduct our business, live or shop — might evolve and what that means for the future of the real estate sector.
The Office as a Destination
With workspaces becoming more of a destination (rather than just a location where employees are expected to be every day), the ability to offer the best in terms of office design, health and sanitation is vital.
To that end, gone are the days of cramming as many employees as possible into each square foot of office space. Instead, employers are now diverting important resources into improving the workplace — and using it as a way to attract and retain talent.
For instance, must-have amenities currently include not only efficient ventilation systems, plenty of natural light flooding into the office, fitness centers, outdoor shared areas, and quiet space to make phone calls, but also a range of services: Some employers even have apps that help workers plan their day, food, and car service, while others offer concierge services.
Furthermore, the flexibility provided by coworking and shared spaces has created solutions for companies and employees operating under a hybrid work schedule.
“There’s more of a corporate footprint in coworking,” reported one data firm executive who was interviewed by ULI. “It provides more flexibility in terms such as lease length and amount of space. You can take a smaller footprint than you could elsewhere, and companies can pick up the amenities coworking has to offer.”
The (As of Yet) Uncertain Role of Office Conversions
One of the first aspects that caught the attention of industry professionals was the decline of older office stock – buildings labeled as Class B or Class C assets, in accordance with the quality and diversity of their amenities – in favor of newer developments. In fact, a study by JLL highlighted that, between 2020 and the second quarter of 2022, properties completed in 2015 or later had a net absorption of 86.8 million square feet, whereas buildings older than that had negative net absorption of 246.5 million square feet. Notably, most negative net absorption (195.5 million square feet) was in buildings completed in the 1980s and earlier.
This means that office conversions and rehabs could play a major role in giving these older office spaces a new lease on life. And, some of the existing inventory is already being converted into multifamily, industrial, medical offices, life sciences and other uses.
For example, in an attempt to stabilize office vacancies in Midtown Manhattan (which has witnessed a dip in tenant interest as companies vie for spots in the newly developed workspaces in Hudson Yards), developers such as Silverstein Properties and Macklowe Properties have begun converting office towers to apartments. Additionally, states like New York and New Jersey are looking into ways to reduce the red tape typically associated with the conversion process.
Despite these efforts, conversions remain sporadic relative to the existing inventory, mainly as a consequence of logistics. According to data provided by Yardi Matrix, roughly 150 million square feet of office space is under construction nationally.
However, while the idea of reintroducing older office stock into the market — especially as a means of addressing growing housing shortages — sounds like a win-win for those involved, the situation is not without its challenges, as noted by Moody’s Analytics:
“The office-to-apartment conversion trend will likely be a minor one, unless office values and rents see some major, permanent decline after the pandemic. Finding an obsolete office building at the right price and asking rents, with high vacancy and the right floor plates to convert into an apartment building is great in theory, but hard to execute in today’s market.”
For more insights, read the full report here.
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