Re:Generation Edition 02
current structural vacancy rate in the US 14.5%
pre-pandemic rate of vacancy 12%
Remove, revive or repurpose Office vacancy report:
“
The more efficient use of real estate and removal of poorly performing office buildings…
may leave the office market stronger than before the pandemic”
Small, old and in the wrong part of town
The report found that – in the most extreme cases – downtown office buildings between 100,000 to 300,000 ft 2 that were built between 1980 and 2009, were in a high crime area and had few nearby restaurants suffered the greatest occupancy loss since the start of the pandemic. These offices – which CBRE coined Hardest Hit Buildings (HHBs) – are generally undesirable to today’s tenants. Consequently, it advised that owners must improve these properties or continue to lose tenants to better quality buildings. Cities contending with lower tax revenues from falling property values and fewer downtown office workers are looking for solutions. While some are urging employers to require that workers return to the office, others plan to transform their traditional business districts into attractive mixed-use centres.
This will be achieved via incentives to convert poorly performing office buildings to other uses, such as apartments. Although conversion activity has accelerated since the pandemic, the cost of acquiring and converting buildings has limited the viability of such projects. Apart from cost, the size of office building floorplates may not be conducive to apartment conversion. The ideal floorplate, the report suggest, is 15,000 ft 2 , but found that less than a quarter (23%) of HHBs have floorplates that size. It becomes more difficult and cost-prohibitive to convert office buildings with larger floorplans to residential use. The report concluded that HHBs were likely to increase the long-term structural vacancy rate in the US to 14.5% – up from its pre-pandemic rate of 12% .
Over the next few years, it suggests, public-private partnerships will help transform cities and real estate to accommodate changes in how people live and work. The more efficient use of real estate and removal of poorly performing office buildings combined with a muted development pipeline, may leave the office market stronger than before the pandemic. But how long the market takes to rebalance could well depend on what happens to the hardest hit buildings. While this is a US report, it is clear that its findings have echoes in the UK market too. Multiple factors, not least the impact of Covid and acceleration of home working, have highlighted the vulnerabilities of less desirable offices, leading to uneconomic vacancy levels. To avoid long term zombie status, a program of remove, revive or repurpose of buildings with persistent high vacancy is just as needed in the UK as in the US.
A recent report by CBRE looked at US office buildings with the most vacancies and discovered they shared common characteristics. It concludes that action is needed to remove, revive or repurpose buildings with persistent high vacancy. Many of these characteristics are also relevant to the UK office sector.
The pandemic changed a lot of things. Three years on and much of life is easing back to being much as it was before. But one thing that really came of age – and shows few signs of declining – is the fashion for hybrid working. Not only has it made Mondays and Fridays a little less frantic, it has also created a structural shift in the office market, reducing demand for space and propelling overall vacancy rates to multi-decade highs.
This is just as true in the UK as in the US, where CBRE – the world’s largest commercial real estate services and investment firm – recently studied post- Covid vacancy rates. It found that amid a general flight-to- quality under these tenant-favourable market conditions, it wasn’t as simple as ‘newer’ buildings doing better than ‘older’ ones. The factors behind high vacancy – which have similarities in the UK market – were more nuanced.
*With thanks to Jessica Morin, Director of US Office Research at CBRE.
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