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CRE Experts Say “Not So Fast” to Doom-and-Gloom Office Headlines

This is the first in a series of stories about the office sector that go beyond the negative headlines. Future articles will focus on debt maturities, opportunities in the industry and how owners are improving occupancy.

Petra Durnin

Headlines heralding the office sector’s doom were common during the past several months. “The Next Crisis Will Start With Empty Office Buildings,” proclaimed a June article in The Atlantic. “We definitely think the Office Sector is Crashing,” a Yahoo Finance article noted. Also in July, Forbes predicted that “Demand for Office Space Could Fall 13% by 2030 – and That’s Not the Severe Forecast.”

Eli Randel

But experts tell Connect CRE that these headlines fail to delve into the office sector’s nuances. Said CREXI’s Eli Randel: “Many office buildings continue to perform and operate very well, even as implied value suffers from the macro environment and general perception of the product type.”

“The ‘office is dead’ headlines we read about are specifically about high-rise office buildings in crowded cities where the workforce has a terrible, prohibitive commute,” added Hayim Mizrachi with the MDL Group.

Class A Holds its Own

The best way to describe the office sector is “bifurcation.” Or, as Adam Showalter with Stream Realty Partners put it, the split between the “haves” and the “have nots.” The “haves,” he explained, are the well-located, newer buildings “garnering outsized demand and coupled with limited supply.” But that demand means less interest in “the lesser-located, non-trophy ‘have-nots,’” Showalter commented.

Hayim Mizrachi

“Class A buildings are very sought after, particularly if they include a great amenities package,” said KDC’s Aarica Mims. Additionally, if those buildings are “within walking distance of restaurants, green space, shopping and other fun activities, (it is) at the top of a company’s wish list when evaluating a new corporate home.”

One reason why those heavily amenitized and conveniently located buildings are so desirable is because of employees. In other words, while employers might demand employees return to work, employees want the amenities to entice them there.

Aarica Mims

Noted Mims: “Employees aren’t coming to the office to work. They are coming for an overall positive experience, including fun, collaboration and creativity.” As such, it’s not unusual for companies in older buildings to “trade up” into newer buildings “to make it exciting to come to work and improve company culture, which has taken a hit since the pandemic,” she added.

Don’t Count Out Older Space

Though the newer Class A assets continue to attract occupiers, some experts noted that older space has its place, not as office-to-residential conversions (as more headlines have indicated) but as reimagined space.

Tony Russo

Tony Russo with Lee & Associates explained that private owners of Class B+ structures have upgraded their buildings in Chicago’s suburban office market. Meanwhile, the employees of these buildings are reducing their overhead through smaller footprints “while still providing a setting that gets people into the office,” Russo said. “I call it a ‘flight to practicality.’” In other words, the well-located, somewhat older buildings have similar amenities to their Class A counterparts “but may lack something like covered parking,” Russo explained. “We’ve seen noteworthy leasing activity in buildings that fit this description.”

Scott Morse

Speaking of “well-located,” “you have mature buildings that possess dynamite locations and offer tremendous value for businesses,” said Scott Morse with Citadel Partners. Employees also favor these buildings, as they don’t have a long commute to spend a day at the office.

Morse explained that Citadel Partners has space on the Dallas North Tollway because of the location. Additionally, “the economics made sense for us,” he explained. “Not every business can justify, or needs to, pay a lease rate commensurate with today’s interest rates and construction costs to turn a nice profit for their business.”

What’s Next?

Ira Singer

The higher-quality buildings will continue to be in demand. But what about their older counterparts? According to Mosaic Construction’s Ira Singer, owners that reposition the older spaces—including changing traditional lease models and considering short-term rental spaces and common-area amenity spaces – could help attract and retain tenants. “Upgrading office and building technology are also key drivers that commercial office building owners realize are differentiators that set them apart,” he said.

Adam Showalter

Petra Durnin with Raise Commercial Real Estate agreed that upgrades in technology—like AI-focused concierge services and maintenance robots—would improve the tenant experience. Some buildings could offer features, including green spaces or vertical farming. This would improve air quality while supporting urban agriculture needs. Furthermore, “buildings with modular interior designs that can be reconfigured could meet changing needs over time and reduce construction waste,” Durnin observed.

The takeaway from all of this is that, yes, office vacancies are up. But the office sector isn’t necessarily doomed. Trophy assets continue attracting tenants, while well-located, mature buildings garner interest. “All office space is not created equal,” Durnin observed. “Neither is it all doomed for the same fate.”


Inside The Story

Raise Commercial's Petra DurninKDC's Aarica MimsMDI's Hayim MizrachiCitadel Partners' Scott MorseCREXI's Eli RandelLee & Associates' Tony RussoMosaic Construction's Ira SingerStream Realty's Adam Showalter

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