Rough Seas for Office

When the pandemic struck, real estate professionals started thinking about how it would impact their business as well as what opportunities it might present. (Remember, the 2008-09 recession created exceptional buying opportunities.)

At that time, it seemed like office would be the most impacted property sector since many professionals worked from home and stayed connected via technology. A few years later, that’s exactly how it played out.

The Status of Office Today

Today, office property owners and investors are in rough, unchartered waters. Historically, property markets suffer from a lack of liquidity or an oversupply of space but rarely at the same time. Add a fundamental change in how office is being used, and the result is a market unlike one we’ve ever experienced.

What are the Characteristics?

• A record level of vacancies with more anticipated as leases expire with tenants downsizing due to     changing work habits
• A large volume of low interest rate loans maturing in the next two years with a dearth of financing to replace them
• A significant inventory of office buildings that no longer meet the needs of today’s office workforce
• An uncertain lending environment with banks holding office loans potentially under stress
• Rapidly declining values with potential investors waiting until there is more market trend clarity

What’s the Solution?

To be sure, the more modern, well-located buildings will recover over time, yet their owners might not fare so well depending on capitalization and financing. There’s much talk that some buildings might be obsolete, and large sites could be demolished and replaced with residential uses. This will have the dual benefit of increasing the housing supply and bolstering the value of the remaining office buildings.

Consideration is also being given to converting office buildings to residential or hotel use. Those opportunities are limited with hurdles to overcome, including location, building design floor sizes, code restrictions, zoning regulations, and costs. Demolition might be a better option.

Return to Office?

Companies asking (or requiring) employees to return to the office would certainly have a positive impact on this struggling sector, but a full migration back to the office remains elusive for now. The increased use of office technologies certainly will limit what in past down markets might have been a robust recovery. And the longer the recovery takes, the more foreclosures will occur.

Stan’s Strategy

It is a great time to look for office space to lease. From an investment standpoint, I would research properties which can attract tenants but might be available at a steeply discounted price due to lack of capital or financing issues.

But keep in mind—just because it’s cheap doesn’t make it a good deal. As always, patience and diligence are rewarded.