SIORs See Office Vacancies Remaining a Challenge
Despite the concerted efforts of several prominent employers to encourage employees back to the office, the trend of remote work (which skyrocketed during the COVID-19 pandemic) remains strong, and with it, continued high vacancy rates in a number of markets.
“After two years of overhyped return-to-work prognostications, many desks around the nation still sit vacant,” wrote Patrick Sisson in The New York Times near the beginning of 2023 in his article, “Getting Creative with Vacant Office Space: Storage, Gym, Film Set.”
“The glut of office space left by the pandemic-induced transition to remote work is expected to remain a stubborn problem in big cities across the nation.”
Sisson cited Tracy Hadden Loh, a fellow at the Brookings Institution who focuses on real estate, as noting that “the surplus of office space is 20%-40%, depending on the city.”
“In 2023, more workers than ever before are working remotely,” blogged Katie Kistler, a self-proclaimed “real estate fanatic who loves discovering and writing about innovations in property technology,” in her column, 6 Ways to Transform Your Empty Office Space to Make a Profit. “Because of this, thousands of offices are still sitting empty two years after the pandemic left them vacant.”
Though office vacancies have certainly increased over the past few years, every market is different. “Office vacancy rates in the CBD are historically high for Boston, with approximately only 30% to 35% of the workforce back in the office,” adds Arlon Brown, SIOR, SVP at The Parsons Commercial Group.
In the Detroit metro area, however, things are a bit more mixed according to Gary Grochowski, SIOR, director of agency leasing with the Colliers Detroit office. “The office market landscape in Metro Detroit is nuanced and reflective of broader trends reshaped by the hybrid work environment,” he states. “While it's true that the demand for office space has seen a downturn in many areas due to the shift towards remote work, it's also important to highlight the resilience and adaptability in certain submarkets and specific buildings within our region.”
Suburban “downtowns,” particularly in Birmingham and Royal Oak, Mich., Grochowski observes, enjoy single-digit vacancy rates, “driven by a preference for proximity to home and the desire for walkable amenities,” but suburban Class B and C properties have elevated vacancy rates. In the CBD, some lateral moves and downsizing are observed. “There's still activity indicating a demand for higher-quality buildings endowed with amenities,” he adds.
On some empty floors of Midtown Manhattan office buildings, unused space has lately been playing a new role: film set.
WHAT TO DO WITH EMPTY SPACE
In his NYT article, Sisson also cited a number of highly creative strategies being employed to fill empty office space. “Some building owners convert office buildings into apartments and life sciences labs as a long-term solution, but others are seeking shorter-term options that are cheaper and easier to manage, like renovating space to accommodate self-storage, gyms, and even schools,” he wrote.
Sisson additionally noted an even more creative solution. “On some empty floors of Midtown Manhattan office buildings, unused space has lately been playing a new role: film set,” he shared. “The transformation from a real-life office into a facsimile on the small screen is part of the business strategy of Backlot, a location service for film and television production in New York, which offers landlords a way to earn revenue from their lifeless cubicles.”
And Kistler cited these potential options:
- Private events
- Professional development and training
- Photography and art studios. “Photographers and artists need large, expansive spaces to set up and store equipment, invite clients for consultations, and to produce their work,” she noted.
- Pop-ups (Short-term retail operations, i.e., during holidays.)
- Hot desking. “You likely have entire sections of your commercial building that go unused,” Kistler noted. “Offering remote workers a chance to rent a seat at your office brings some of that profit your way.”
“In our market, landlords aren’t getting overly creative/desperate to reutilize space,” says Grochowski. “We have seen some multi-family conversions, which signals a trend towards more versatile property uses. And some buildings have embraced mixed-use development by integrating retail and food services into their spaces.”
The transformation of oversized parking lots into new construction retail venues, Grochowski continues, “is particularly noteworthy. This approach not only repurposes underutilized land area due to diminished parking loads, but also enhances the attractiveness of office buildings by offering tenants convenient access to shopping and dining options right at their workplace.”
In addition, he says, the conversion of ground-floor office spaces into retail units is gaining traction. “This strategy effectively leverages high-foot-traffic areas, offering businesses visibility and accessibility while diversifying the building's income sources,” he observes. “In the right location, this can significantly boost the property's value and appeal.”
Brown, adds, however, that conversion to multi-family space is not as easy as it may look “at first blush.” Most modern office buildings, he explains, have large floor plates, so “the configuration is off. Plus, you have to put in light wells in larger office buildings. The next issue is, where’s all the plumbing?” And of course, he adds, there’s the significant recent increase in the cost of all kinds of supplies.
The bottom line, he says, is that “it’s extremely difficult to make the numbers work.” It is however, “better than empty,” so “it depends on how expensive and how much vacant space there is.”
More innovative approaches, he continues, have been to turn office buildings into tiny manufacturing facilities. “To be perfectly honest, I find it very difficult,” says Brown, noting floor loading and passenger—not freight—elevators, among the key issues. “It’s more of a ‘Hail Mary,’” he asserts. And, reflecting an option Kistler had enumerated, “They’re also looking at converting the buildings to artist lofts.”
This, he offers, is more doable, especially in buildings with high ceilings and exposed brick. “It’s something to consider,” says Brown.
The creative strategies being employed today are not merely stopgap measures, but are shaping a more dynamic, resilient, and human-centric office market for the future.
CREATIVITY ON BOTH SIDES
Both landlords and brokers are exercising their “creativity muscles,” it seems, to address the glut of empty office space. “One of our landlords in the CBD district has a ‘Pot-Of-Gold’ contest,” shares Brown. “You receive a $100 gift card every time you show their property, and you get entered into a drawing for $10,000, which is held at a cocktail party on St. Patrick's Day.”
Brokers, he says, are trying to get more creative with open houses, events with games, and having meetings at downtown hotels with ‘fancy cocktail parties’ where they introduce their projects, trying to get people knowledgeable and excited.
For Grochowski, that creativity extends into leasing strategies. “Adaptability has allowed us to meet the demands of tenants seeking shorter commitments without compromising the financial viability for landlords,” he shares. “For example, by reevaluating the pricing models, we've successfully brokered deals that are financially beneficial for both parties.”
A case in point, he shares, involved a tenant with a requirement for only a one-year lease, along with specific improvements to the space. “Through creative negotiation, we were able to secure an 18-month lease at a rate of $22 sq. ft, higher than the standard asking rate of $16.95 sq. ft. for longer terms,” says Grochowski. “This adjusted rate made it feasible for the landlord to provide the requested improvements, accommodating the tenant's need for a shorter lease term, while also preserving the landlord's revenue objectives.”
Still, says Brown, all the creativity in the world may not totally solve the current problem until—and if—the work from home trend is reversed, or at least, ameliorated. “I think that we have to wait until the trend changes and major companies require their employees to go back to the office,” he says. “There are several companies going in that direction now, like JP Morgan Chase, IBM, UBS, etc.”
Adaptability has allowed us to meet the demands of tenants seeking shorter commitments without compromising the financial viability for landlords.
Grochowski is a bit more sanguine. “The current trend toward creative approaches in the office market, such as adaptive reuse, mixed-use development, and flexible lease terms, demonstrates an evolution rather than a departure from traditional office use,” he asserts. “Creativity in deal-making, an element that has always been essential within the real estate sector, is playing a pivotal role in adapting to this ‘new reality.’ I am optimistic that these innovative strategies will contribute to a resurgence in office market occupancy rates.”
In addition, he observes, while the future may not hold a return to the conventional 40-hour workweek, a hybrid model that combines the flexibility of remote work with regular in-office presence appears to be emerging and can actually be positive. “This balanced approach acknowledges the need for human interaction and the benefits of in-person collaboration, while also embracing the flexibility that modern workers value,” he declares. “As such, the creative strategies being employed today are not merely stopgap measures, but are shaping a more dynamic, resilient, and human-centric office market for the future.”
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
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