Workers Aren't Coming Back To The Office, And Building Conversion Efforts Are Showing Mixed Results

New numbers surrounding investment in commercial office space remain bleak, with vacancy numbers rising. 

According to the office security company Kastle, the 10-largest office markets in the country are now 53% vacant and may become worse when long-term office leases expire. 

Property owners hope that reimagining office space may eventually save their investments. In the past two years across the United States, adaptive-reuse apartments jumped by 25% as developers transformed empty office buildings, rundown factories, shuttered healthcare buildings and old churches into housing, according to RentCafe. 

The reimagining brought 28,000 rentals onto the market in 2020 and 2021.

But investors are wary of any real change coming soon. 

“Our firm is on pause for more office investments, but I agree many have to be repurposed,” said Ryan Williams, founder and executive chairman of the New York-based commercial real estate investment platform Cadre. “But any investment has to be focused on New York and big-city offices.”

According to RentCafe’s list of top cities for adaptive reuse projects, Los Angeles, Cleveland, Ohio, and Buffalo, New York, lead the list, as many large cities are going headlong into converting office space for residential sales and rentals. But they have also found varying degrees of success, including: 

• Dallas, New York and Baltimore have enacted subsidy programs. Still, pandemic-era financial support has proven to have reaped few benefits. 

• Washington D.C., Mayor Muriel Bowser and her Office of the Deputy Mayor of Planning and Economic Development (DMPED) recently celebrated the conversion of the old Vanguard building into the new Elle Apartments. The Vanguard opened in 1965 and once housed the Peace Corps. Bowser is encouraging investors to make similar plans for other buildings throughout the city. 

• St. Louis is looking at tax incentives to support a $300 million plan to turn the city’s vacant AT&T tower into apartments, modern office space and a hotel. The developer, based in the St. Louis area, is asking for a sizeable tax abatement of 95% of the assessed property value for up to 15 years. 

On Capitol Hill, Michigan Sen. Debbie Stabenow is attempting to help incentivize more investment in vacant office space by proposing a bill that will create a federal tax incentive to do so. 

While these efforts are laudable, according to CBRE Group Inc., even with all the planned office conversions planned through 2025, combined with those completed since 2016, the transition only amounts to a total of 2% of U.S. office space. 

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“Adapting to residential is just one opportunity. There are others by adapting even newer empty office space buildings to life sciences locations and other niche centers,” Williams told Benzinga. “Overall, my view on office space, from a macro perspective, is that if you have the right location and the right amenities, there might still be demand if they’re offering things like child care and food services. But as far as people returning to the office? I don’t foresee that happening anytime soon. It’s really up to the investors and landlords to adapt their spaces to draw new tenants.”

Williams said Cadre is focused more on the current economic climate on multifamily rentals, hotels and industrial properties in cities like Charlotte and Asheville, N.C., the D.C. suburbs in Maryland, parts of New England and Philadelphia, where he says the investment value is high. But whether discussing office space, industrial or mix-used investment properties, he says property owners will have to continue to be creative to set themselves apart and draw new tenants. 

“Companies are going to have to really utilize technology that drives efficiency, improves the office experience and heightens revenue,” he said. “But a bigger problem is that there is a lot of floating debt right now, and not everyone is going to be able to afford those capital improvements. Some developers are going to need rescue capital at a higher interest rate, and no one is talking about that right now.” 

Williams’ warning reflected that of CBRE, which reported one of the more significant issues is that renovating office space could in some cases be more expensive than buying new. 

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