Converting Vacant Office Space into Innovative Workspaces: The Future of Class B and C Properties
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
The real estate market, particularly the office segment, has been heavily damaged by the COVID-19 outbreak. There is an oversupply of Class B and C office properties, particularly in suburban regions, as a result of the decline in demand for office space as remote work became the standard for many workers. Given the current economic climate, many facilities may no longer be appropriate for use as typical offices, but there is an increasing demand to put them to other, better uses.
The Status of the Office Market Right Now
The idea of a monolithic market for office space in the United States is erroneous, as local conditions make reliance upon national averages prone to error, but the Dallas-Fort Worth office market is showing indications of progress, according to a report from commercial real estate services and investment firm CBRE, although a full recovery is still some time off. Despite a minor decline to 20.4% in the fourth quarter of 2020, the office vacancy rate was still higher than the 19.3% rate noted in the third quarter. Despite a minor increase in net absorption, leasing activity continued to fall, according to the study. Moreover, DFW saw a growth in sublease space, which made up 23.3% of the total amount of office space available in Q4.
This pattern is not exclusive to DFW. Class B and C office properties are in short supply in many American cities, especially in the suburbs. Demand for conventional office space is anticipated to continue to fall as more businesses implement remote work rules. The suburban office market is predicted to remain poor in the short term, with little new leasing activity and more subleasing, according to a forecast from real estate services company JLL.
Class B and C Office Property Reuse
Repurposing Class B and C office premises for higher and better uses is becoming more and more necessary given the status of the office market at the moment. Given that there is a greater need for housing as a result of the COVID-19 pandemic, one feasible solution is to turn these properties into residences in lieu of replacing them entirely. For instance, San Francisco municipal officials are thinking about turning the former Twitter headquarters into a 200–250 bed transitional housing facility for families and individuals who are homeless.
Yet, because office buildings and housing have different infrastructural needs, it is not always easy to convert office buildings into housing. For instance, compared to residential structures, office buildings sometimes feature larger floor plans, fewer windows, and different facilities aimed at business functionality, which deters potential tenants. It may cost more to convert office buildings into residences since they have distinct electrical and mechanical systems from residential structures. The conversion of office buildings into housing may also be prohibited or restricted by local zoning and building regulations, which makes it challenging to get the required licenses and permissions.
Repurposing Class B and C office buildings into mixed-use complexes is an additional possibility. Mixed-use buildings or complexes integrate several functions, such as residential, business, and retail, in a single structure. By appealing to a wider spectrum of potential tenants and users, developers can aid in raising demand for the property. By combining many uses in one place, mixed-use developments can also aid in building more lively and sustainable communities.
For instance, the former Westinghouse Electric corporate headquarters in Pittsburgh will be transformed into a mixed-use project containing office, retail, and residential space. In addition to a hotel, residences, and grocery store, the development is anticipated to have a public park and a new riverfront trail.
Repurposing Class B and C Office Properties: Difficulties and Risks
Although the current oversupply of office space and the rising demand for housing can be addressed by converting Class B and C office buildings, there are a number of difficulties and dangers involved in this approach.
Cost
The highly-variable cost of reusing the property is one of the biggest obstacles. It can be a challenging and expensive process to transform an office building into a mixed-use project or housing, involving major investment in design, construction, and maintenance. A conversion of the property might also be restricted or prohibited by laws and regulations, such as zoning and construction codes.
Risk of Miscalculation
The possible risk of reusing the property presents another difficulty. The developer might not be able to repay their investment or bring in enough money to cover operational expenses, for instance, if demand for housing or mixed-use space is not as strong as projected. This may result in the property losing its ability to support itself financially, which could have a detrimental effect on the neighborhood.
Economic Risks
Repurposing Class B and C office buildings could also have an impact on the overall economy, particularly in light of the growing cost of living and mortgage rates. Inflation has been increasing as the economy works to recover from the pandemic, which can raise the price of products and services, including the cost of building and repair. In addition, higher interest rates may make funding more expensive for investors and developers.
These elements can increase the difficulty and danger of repurposing Class B and C office buildings since they may result in higher-than-expected operating and conversion costs. This may have an effect on the project`s overall economic feasibility and lessen its appeal to financiers and developers.
Advantages of Repurposing
Repurposing Class B and C office buildings has significant advantages as well, especially in the context of the current business climate. Investors may explore alternate investment categories, such as real estate, as interest rates rise. Class B and C office property repurposing can present a chance to invest in real estate assets that may be undervalued and have long-term growth potential.
In addition, the need for affordable housing is expanding, especially in urban and suburban regions. Repurposing Class B and C office buildings can help. Developers can assist in offering more budget-friendly options for individuals and families by transforming existing assets into apartments, which can help ease the housing problem in many cities.
Takeaways
For the real estate sector, the overabundance of Class B and C office buildings, especially in suburban locations, poses considerable difficulty in the current work environment. The possibility to fulfill the rising need for housing and mixed-use space, as well as to build more dynamic and sustainable communities, can be found in repurposing old properties for higher and better uses.
Although there are difficulties and dangers involved in repurposing Class B and C office buildings, there are also possible advantages, such as improved financial prospects and the ability to offer more reasonably priced dwelling options, as well as being closer to more residential areas already. Developers and investors should, however, carefully weigh the costs and risks involved with repurposing these properties, especially in light of the recent increase in interest rates and inflation.
In the end, repurposing Class B and C office buildings necessitates a careful balancing of economic, social, and environmental factors, as well as a dedication to generating long-term value for investors, tenants, and communities. The real estate sector may assist in addressing the difficulties of the current market while generating growth and development opportunities in the years to come by cooperating to create novel solutions.
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