Strategies for Repositioning or Repurposing Office Properties

As more people work from home, office buildings need to change. Many office spaces are empty due to low demand, high interest rates, and a shift towards higher-quality buildings. Even big companies like Columbia Property Trust and Brookfield Asset Management have struggled.

A new report by Cushman & Wakefield says there will be 330 million square feet of vacant office space by 2030. This is on top of the 740 million square feet already empty. Office owners need to rethink how to use their properties. The report, "Obsolescence Equals Opportunity," offers some ideas.

First, owners need to decide if their building is outdated or just not competitive. Abby Corbett from Cushman & Wakefield explains that some buildings can be updated to attract tenants. Others may need to be completely repurposed for a different use.

Abby Corbett, global head of investor insights for C&W and one of the authors behind the report, clarified the two categories during a recent interview with LoopNet. "If you're facing competitive obsolescence, you might be a candidate to reposition the asset up the value curve ... and try to appeal to tenants who are still active in the market," Corbett said. Alternatively, your property might be "functionally obsolete," meaning that it's no longer suited to being utilized as a contemporary office property. "And then you're looking at conducting the highest and best use analysis of well, ‘what do we do with this asset?'"

In either instance, property owners have options. As Richard Jantz, C&W executive managing director and tri-state lead for project and development services, said during an interview with LoopNet, "I do believe that investors and asset owners are going to figure out a way to reset and use this office [space] for a purpose. I think that we can really make it useful."

Step-by-Step Guide for Repositioning

1. Initial Assessment

Evaluate your property to determine if it's outdated or just not competitive. Conduct a thorough market analysis to understand current tenant demand and competitive landscape.

2. Improvements and Enhancements

Identify the types of improvements needed, such as:

• Enhancing common spaces like lobbies and parking.
• Upgrading building systems like HVAC and elevators.
• Adding amenities that appeal to modern tenants.

3. Competitive Analysis

Conduct a competitive analysis of office properties in your market or submarket. Understand what competitors are doing and aim to create a project that sets your building apart.

4. Engage Professionals

Work with project management professionals early in the process to determine project costs. Overlay these costs with an analysis of achievable rents in the market post-improvement.

5. Creating a Sense of Place

Collaborate with workplace strategy and property management experts to create a strong sense of place. Consider adding common outdoor areas like patios or roof decks.

6. Affordable Improvements for Smaller Owners

Even if you're a small owner, look for ways to infuse community and engagement into your property. Consider local artists' contributions or small-scale enhancements.

7. Differentiation

Ensure your property has something unique to differentiate it from the building next door. It doesn't need to be extravagant but should stand out in some way.

Multifamily Conversions

Over the past several years, perhaps the most widely discussed scenario involves converting an office into multifamily. With the country's perennial shortage of housing, it's easy to understand why the idea of converting a largely empty office property into apartments makes sense. As the report notes, such conversions have historical precedent. Following the stock market crash of the late 1980s, when office vacancies in New York City exceeded 15%, space in approximately 60 properties was converted into more than 12,000 multifamily units.

But as many architects have noted, most of those properties were of an older vintage than the 1970s and 1980s stock that's prevalent in many cities' urban core today. Consequently, they tended to have smaller floorplates, which made them more suited to multifamily conversion.

"Office buildings typically have larger floorplates, making it difficult to bring natural light into the core of a building," the report notes. This means that conversion from office to multifamily could result in a significant loss factor, or a decrease in the amount of usable square footage.

Other architectural elements can make an office-to-multifamily conversion challenging, according to the report, "such as the shape of the physical structure, façade, ceiling heights, window placement and more."

In terms of the costs of such conversions, estimates vary widely, from approximately $100 per square foot to nearly $700 per square foot. The higher costs will be borne by properties that need capital-intensive projects, such as entirely new façades, extensive plumbing and HVAC retrofits or asbestos remediation.

Ultimately, the feasibility of these conversions will often be dictated by the purchase price of the asset. Since 2020, the average cost per square foot of office properties that have been purchased for conversion into multifamily is $127 per square foot, according to the report. This represents a fairly significant discount from the $234 per square foot average paid for all office properties during the same time period. Moreover, given that high-rise multifamily properties have traded at an average of $632 per square foot since 2020, there is significant room for investment in office to residential conversions, provided all of the other factors align.

Office-to-Life-Sciences Conversions

An office-to-life-sciences conversion represents a "step up in degree of difficulty in execution" compared to an office-to-residential conversion, according to the report. Nonetheless, this prospect remains compelling given the sector's record low vacancy, at 3%, and exceptional rent growth - which has totaled 67% nationally since 2015.

A common misconception regarding these conversions is that only physical and infrastructure aspects of the property itself need to be considered. However, before those issues are even confronted, property owners need to evaluate the various subtypes of life sciences properties as well as the variety of potential users to determine if any are suited to their property. The surrounding transportation infrastructure and proximity to local relevant talent are other critical factors that need to be assessed.

Once those aspects of the property have been vetted, owners can begin to determine whether the property possesses or can be converted to offer the requisite physical characteristics that life sciences users seek - including zoning, building layout, structural considerations, live load floor parameters, HVAC, plumbing requirements and electrical considerations.

Other Conversion Possibilities

Additional conversion possibilities detailed in the report include medical office and mixed-use. There are even examples of suburban to industrial conversions presented as case studies.

The report notes that mixed-use conversions can often be more approachable for an owner than a comprehensive office-to-residential conversion, as these projects "diversify the property income stream as well as potentially save on retrofit costs." As an example, the report discusses the planned conversion of the One AT&T Center in St. Louis, where the property's new owners intend to convert a portion of the property into 318 apartments, while also adding a 150-key hotel, numerous amenities and preserving approximately 20% of the existing office space.

While office-to-industrial conversions may be hard to envision, the report cites at least one example, in Simi Valley, California, of a Bank of America corporate office that was converted into a distribution hub for Amazon. The report also highlights the conversion of a former AT&T corporate campus into a "metroburb," a large-scale mixed-use development that aims to provide all of the uses found in an urban center - office, retail, entertainment, hospitality, residential, health and wellness, etc. - in one suburban location.

The exceptional diversity of repositioning and repurposing strategies in the report suggests that while every outdated office property may have its share of challenges, it also has a vast wealth of potential. In the end, it's about finding the right strategy for each particular property and market.

Or, as Jantz put it, you need to identify, "where is the need? And then cater to the need."

This article was updated on 7/15/2024