Empty offices struggle in the era of remote and hybrid work
With many companies shifting to remote and hybrid work, the demand for office spaces is dwindling, and property values are decreasing.
According to an analysis by the Office of Financial Research of the U.S. Department of the Treasury, the problems facing office buildings are reminiscent of those facing nearby shopping malls around the turn of the century, when Americans began to massively switch to online shopping.
Since then, many shopping malls have closed as retailers scaled back their physical operations.
However, some 'zombie' malls have been brought back to life and repurposed for other uses, even after standing vacant and abandoned for years.
"To include adaptive reuse uses in regional shopping malls, there are new retail spaces with smaller footprints, mixed use, and storage/distribution spaces," says the analysis by the U.S. Treasury Department. "More multi-purpose options include using the spaces as cricket stadiums, police stations, and indoor cannabis farms."
Could struggling office buildings eventually be transformed into apartments, stadiums, or indoor farms?
It's very plausible. The key is whether office vacancy rates in the commercial real estate market will return to pre-pandemic levels.
"How much office space is needed when people work from home is a major focus, and that's a major focus," said John Toohig, head of commercial real estate lending at Raymond James, to CNN. "This situation will last for a while."
"The bankruptcy loans for office buildings show a trend for buildings in city centers," said Toohig.
That means that vacant offices in cities such as San Francisco and Washington, D.C. are more likely to be repurposed, as they face significant challenges like declining property values.
According to a report by the McKinsey Global Institute, remote work by 2030 could lead to a property value loss of office buildings in major cities worldwide of up to $800 billion.
A lot depends on the feasibility of repurposing a dilapidated office building, which often requires a feasibility study to determine if the costs of conversion will pay off in the long run.
For example, turning a commercial building into apartments requires a study to determine if there is enough demand for housing in the area (other studies might consider other factors).
The prospects for offices in 2024 are not encouraging.
According to a recent estimate by commercial real estate services firm CBRE, office vacancy rates in the U.S. are expected to rise further next year, reaching 19.8%, up from 12.1% at the end of 2019.
For some employers, it won't be easy to bring workers back to the office. In some cases, employees have protested against returning to the office, for example, at X, formerly known as Twitter.
After a high-ranking executive simply waited for him to get fired. (The employee was later fired and then filed a complaint with the National Labor Relations Board.)
As demand for office space remains weak, expect a corresponding adjustment in construction activities.
"The office construction market is expected to slow down to its lowest level since 2014, which could increase the potential for a shortage of Class-A space later this year," said the company.
In the analysis by the Treasury Department, it is noted that "remote work from home arrangements will continue to increase in future employment contracts, the number of sublet-able office spaces is increasing, the actual occupancy rate by workers is still low, and the demand for office space in new companies is continuing to grow." "The leases are deteriorating and the values are deteriorating." The growth of office REIT stocks and increasing delinquencies and defaults in the office sector are signs that the sector may be falling into obscurity.
While recession fears are subsiding, Biden's top economic advisor bets on a soft landing
President Joe Biden's top economic adviser seems to be growing increasingly optimistic that the U.S. economy will avoid the recession that many had predicted, reports my colleague Matt Egan.
"Latest data provide further evidence that soft landing runways are wider," said Lael Brainard, director of the National Economic Council, to reporters on Friday.
The combination of inflation without causing a recession is known as a "soft landing." At least according to most criteria, this type of feat has only been successfully executed by the Fed once in the last 60 years. (Some studies indicate that central banks do this more often.)
Brainard, the former No. 2 at the Fed, didn't directly say that a recession was unlikely. She instead pointed to a series of indicators - moderating inflation, rising real wages, falling interest rates and a growing labor market - as evidence that a soft landing is becoming more likely. "Of course, there is always risk. There is always risk. Now we can identify geopolitical risks and there could be other risks," Brainard said.
The White House official noted that less than a year ago, many economists thought a recession was inevitable.
Read more here.
Next
Monday: The National Association of Home Builders releases its housing market index for December. The Bank of Japan announces its latest monetary policy decision.
Tuesday: Results from FedEx and Ark Restaurants. The Commerce Department reports new residential construction and building permits for November. The Bureau of Labor Statistics releases inflation data for November.
Wednesday: Earnings from Cal-Maine Foods, Micron, and General Mills. The Conference Board releases its consumer confidence survey for December. The National Association of Realtors reports existing home sales for November.
Thursday: Earnings from Nike. The Commerce Department releases its third-quarter GDP growth report. The Labor Department reports initial jobless claims for the week ending December 16. Friday: The Commerce Department releases November data on personal income, spending, and the preferred inflation gauge of the Fed, as well as consumer sentiment data for December from the University of Michigan. The Commerce Department reports new home sales for November.
Other related reads:
The decline in demand for office space has resulted in a decrease in property values, which still has not returned to pre-pandemic levels.
An analysis by the Office of Financial Research of the U.S. Treasury Department reveals that the commercial real estate market is experiencing problems similar to those faced by nearby shopping malls around the turn of the century, when Americans began to massively switch to online shopping.
Since then, many shopping malls have closed as retailers have scaled back their physical operations.
However, some 'zombie' malls have been brought back to life and repurposed for various uses, even after standing vacant and abandoned for years.
"To include adaptive reuse uses in regional shopping malls, there are new retail spaces with smaller footprints, mixed use, and storage/distribution spaces," says the analysis by the U.S. Treasury Department. "More multi-purpose options include using the spaces as cricket stadiums, police stations, and indoor cannabis farms."
Could struggling office buildings eventually be transformed into apartments, stadiums, or indoor farms?
It's very plausible. The key is whether office vacancy rates in the commercial real estate market will return to pre-pandemic levels.
Enrichment Data:
Repurposing vacant office buildings
There are several strategies to repurpose vacant office buildings into various uses such as apartments, stadiums, or indoor farms. Here's a closer look at some of the approaches, including their conversion processes and general considerations.
1. Repurposing into apartments
To repurpose an office building into apartments, you'll need to convert the structure, integrate necessary amenities, and comply with local regulations.
Process
Structural Adaptation: Modify the building's layout to accommodate residential units, converting meeting rooms and conference spaces into apartments. Amenities Integration: Utilize common areas for a mix of amenities like community gardens, dog parks, and sports courts. Zoning Compliance: Ensure that local zoning regulations allow for residential use and comply with relevant building codes and regulations.
Design
Residential Units: Offer a mix of one-bedroom, two-bedroom, and potentially three-bedroom units to cater to different demographic needs. Parking and EV Charging: Design parking spaces to be EV-ready, providing wiring and outlets for electric vehicle charging.
2. Repurposing into stadiums
Transforming an office building into a stadium involves structural reinforcement, seating arrangement, and amenity integration.
Process
Structural Reinforcement: Ensure that the building's structure can support the weight and stress of a stadium, possibly requiring additional reinforcement. Seating Arrangement: Convert the interior space into seating areas, making the most of the existing floor plan to maximize capacity. Amenities Integration: Incorporate amenities like food and beverage stands, restrooms, and luxury suites.
Events
Event Space Design: Design the space to accommodate various events, such as concerts, sports games, or conferences, ensuring there is adequate seating and accessibility.
3. Repurposing into indoor farms
Repurposing an office building into an indoor farm requires modifications to climate control, lighting, and water management systems.
Process
Climate Control: Utilize the existing HVAC system to control the climate, ensuring optimal conditions for plant growth. Lighting Adaptation: Install specialized lighting systems to mimic natural sunlight, using LED grow lights. Water Management: Ensure efficient water management systems to support the needs of the indoor farm.
Design
Crop Selection: Choose crops that thrive in indoor conditions, such as leafy greens, herbs, and microgreens, which require less space and can be harvested frequently. Vertical Farming: Implement vertical farming techniques to maximize space, utilizing hydroponics or aeroponics for growing plants in vertically stacked layers.
General considerations
Sustainability: Emphasize sustainability by reusing existing infrastructure, reducing construction waste, and minimizing environmental impact. Community impact: Revitalize the surrounding area by creating job opportunities and potentially increasing property values. Regulatory compliance: Ensure all conversions comply with local zoning regulations, building codes, and health standards to avoid legal issues and ensure public safety.
By following these strategies, vacant office buildings can be repurposed into various uses that not only maximize their potential but also contribute to the revitalization of urban areas.
