Office Property

Quick Takeaways

Some office buildings can be repurposed
Vacancy rates are predicted to reach near 20% in 2024
Office construction will slow down

Source: Empty Office Buildings May Meet the Same Fate as Zombie Shopping Malls (CNN, Dec. 17, 2023)

The COVID-19 pandemic and the resulting work-from-home orders have greatly affected every facet of real estate, and many office buildings are taking on new lives. Both employers and developers have had to get creative, enticing people back to the office with improved safety precautions and luxury amenities.

Office buildings are forecast to have a tough year in 2024—possible loan defaults and increased vacancy rates. Landlords are offering concessions to retain tenants, such as free rent and flexible lease terms. More commercial landlords are adding shared work spaces to their portfolio and new business models are proliferating.

Co-working has also taken on a whole new life post-pandemic. Though many are not eager to share space with strangers, it has also provided dedicated work space in a year (almost two) when our homes became our offices, gyms, and schools. WeWork and four other co-working companies have just signed a contract with the federal government, the first of its kind.

Four years later, the Covid-19 pandemic continues to affect work life in many ways. After many Americans spent some amount of time working completely remotely, 2022 saw a variety of office return schedules. Hybrid work – a combination of designated in-office and remote days – seems to be here to stay, but only time will tell exactly how it will affect the office property market.

See References for more information.

References

NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.

Office Property Trends

Reconsidering the State of Office (Connect CRE, Jan. 12, 2024)

Russo with Lee & Associates said that owners of Class B+ structures have upgraded their buildings in Chicago’s suburban office market. At the same time, occupiers are moving toward smaller footprints “while still providing a setting that gets people into the office,” he said. “I call it a ‘flight to practicality.’” Speaking of “well-located,” “you have mature buildings that possess dynamite locations and offer tremendous value for businesses,” Morse pointed out. He said employees also favor these buildings, which can mean a shorter office commute.

Office Sector Real Estate – Mass Defaults Expected (Mortgage Professional America, Jan. 9, 2024)

One such office building prototype set to figuratively implode: “Perhaps buildings that were underwritten with unrealistic, somewhat aggressive, assumptions that are now struggling. Loan defaults will also force some of those to market.”

Office Landlords Nationwide Increasing Concessions to Lure Tenants in U.S. (The World Property Journal, Jan. 4, 2024)

"The increase in concessions underscores just how office tenants have an advantage in lease negotiations today," said Mike Watts, CBRE President of Americas Investor Leasing. "It also illustrates an ongoing 'flight to quality' in which companies favor higher quality buildings that will help to entice employees to work from the office. In turn, lower-tier properties have needed to boost concessions to stay competitive in leasing."

Co-Working Spaces

WeWork Went Bankrupt but Flexible Office Space Remains a Growing Force (Governing, Dec. 11, 2023)

Some of the biggest property owners in the world are increasingly adding flexible office space to their buildings, says CBRE's Whelan. Traditional space, customized for long-term tenants, is still the backbone of most commercial property portfolios, she says. But landlords are likely to continue adding space with more flexible designs, and shorter lease terms, as they adjust to changing demands.

This New Coworking Venture Takes a Different Tack: Owning Rather Than Renting (CoStar, Dec. 3, 2023)

Through a partnership formed by Denver-based development firm Koelbel & Co. and a longtime coworking executive, Work Simple has ambitious plans to acquire and revitalize older office buildings in smaller and more suburban office markets across the United States. The firm is targeting buildings in secondary or tertiary markets outside the top-tier population centers such as San Antonio rather than Dallas, or Omaha instead of Chicago.

After WeWork's Bankruptcy, Competitors Carve Out New Models for Growth (Inc., Nov. 21, 2023)

A day pass at the Malin in Williamsburg, Brooklyn, is $75, while WeWork day passes start at $29. But the prices don't seem to be deterring new users. The Malin's revenue has increased by more than 100 percent in the past 12 months, and the company continues to see month-over-month growth.

Hybrid and Remote Work

Real Estate Owners Saddled with Half-Empty Office Buildings as Hybrid Work Trend Continues (CBC News, Jan. 14, 2024)

Jon Wertheim: Your occupancy rates now are about 89%. You said ideally about 92% would be great. I could see people saying, "Oh, that's two, three points difference. What's the big deal?"

Marc Holliday: No, and when you have 30 million square feet like we do, every 1% is a big difference. You know, we pride ourselves in-- in keeping our occupancies, historically, at 95% and above.

Empty Office Buildings May Meet the Same Fate as Zombie Shopping Malls (CNN, Dec. 17, 2023)

The outlook for office buildings in 2024 isn’t very rosy. BRE, a commercial real estate services firm, said in estimates released Thursday that US office vacancy will likely increase further next year, reaching a 19.8% vacancy rate, up from 12.1% at the end of 2019.

The Future of Real Estate in a Hybrid World (McKinsey Insights, Oct. 19, 2023) E

What's clear to us is that hybrid is here to stay. There are three reasons for that confidence. First, the attendance rate we've seen has really stabilized, and it has stabilized for over a year now. Second, actual attendance aligns quite closely with what workers want and expect from their employers. Third, there's a substantial number of knowledge workers who would rather resign or accept a pay cut than come in more often, and many of those folks are the executives in charge of making those decisions.

Useful Websites

ccim.com — Commercial Investment Real Estate Institute

irem.org — Institute of Real Estate Management

sior.com — Society of Industrial and Office REALTORS®

boma.org — Building Owners and Managers Association

crewnetwork.org — CREW

naiop.org — National Association of Industrial and Office Properties

uli.org — Urban Land Institute

eBooks & Other Resources

eBooks.realtor.org

The following eBooks and digital audiobooks are available to NAR members:

Healthy Buildings (eBook)

How to Design and Build a Green Office Building (eBook)

The New Corner Office (Audiobook)

Office Building Safety and Health (eBook)

Office Markets and Public Policy (eBook)

Out of Office: Unlocking the Power and Potential of Hybrid Work (eBook)

Retrofitting Office Buildings to be Green and Energy Efficient (eBook)

Books, Videos, Research Reports & More

As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.

Income/Expense Analysis: Office Buildings (Chicago, IL: Institute of Real Estate Management, 2018) HD 1394 In7i

The Energy Wise Workplace: Practical and Cost-Effective Ideas for a Sustainable and Green Workplace (Lanham, MD: Rowman & Littlefield, 2017) HD30.255 .D66 2017

The Valuation of Office Properties: A Contemporary Perspective (Chicago, IL: Appraisal Institute, 2009) HD1393.58.U6 S55 2009

Lease Guide: Guide to Writing a Commercial Real Estate Lease Including Green Lease Language (Washington, D.C.: BOMA International, 2008) HD 1384 T23

Office Building Management (Chicago, IL: Institute of Real Estate Management, 2002)

Mastering Office Leasing: A Practical Guide (Washington, D.C.: Society of Industrial and Office Realtors, 2000) HD 1384 So1m

Green Office Buildings: A Practical Guide to Development (Washington D.C.: Urban Land Institute, 2005) NA 6230 G74

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