Record-high vacancy rates have plagued the commercial real estate industry since the onset of the COVID-19 pandemic. Loan default threats have also never been higher. Currently almost 13 percent of office space is vacant, according to a recent Axios report, marking the sixth consecutive quarter the rate has increased.
Meanwhile, Cushman & Wakefield said office vacancies across its properties has increased since the start of 2020, and overall vacancy has gone up from 12.7 percent during the first quarter of 2020 to 18.6 percent at the end of the first quarter of 2023 in the 90 U.S. markets the CRE firm tracks.
Rather than despair, several CRE owners are getting creative to save their buildings and businesses, Fast Company reports. Here are some of the steps building owners are taking to drop their vacancy numbers.
Turn one big space into multiple smaller ones
Industry City, a Brooklyn, N.Y.-based hybrid workspace, has taken advantage of its flexible and reconfigurable floor plates and turned a 28,000 square foot space into four 7,000 square foot spaces. Jeff Fein, Industry City’s senior vice president of leasing, said they have had success leasing those spaces since the switch. Fein noted that tenants often want to expand and it’s easy to do so by just taking another quarter of the floor space split.
Industry City now hosts more than 550 companies, while less than half of the available office spaces in New York City are occupied, Fast Company reports. The combination of offering tenants smaller spaces with flexibility to expand and providing high-quality amenities like fitness centers, executive conference centers and high-quality food options has lifted Industry City to 85 percent occupancy.
“Employees have been coming back to the office faster because of these features,” Fein told Fast Company. “We have seen that employees return to the office for an improved experience and professional community.”
Providing new offerings
CRE owner KBS Realty Advisors is offering spec suites to its tenants to help fill vacancies, Fast Company reports. Leasing at the firm’s properties has been steady, per Marc DeLuca, KSB CEO and Eastern Regional President. The spec suite has been ideal for businesses that want to get operations going right away. The suites comprise “high-end finishes and quality furnishings similar to a model home,” DeLuca said. The atmosphere helps ensure a good tenant experience provides the necessary technology the firms need to stay ahead of their competitors.
KBS is also taking location into account and acquiring properties near restaurants, retailers, entertainment venues and public transportation hubs to ensure tenant safety.
Creating hybrid workspaces
Some businesses opted to remain fully remote as things started to reopen following the pandemic. IWG, a hybrid working solutions provider, noticed an uptick in hybrid work arrangements at its properties, however and is leaning into the shift. The company’s space demand has increased 30 percent since before the pandemic as more businesses seek hybrid work solutions, according to Mark Dixon, IWG founder and CEO.
CRE owners are now asking IWG to repurpose their traditional office spaces so they can monetize the currently vacant areas. It’s become apparent that businesses like the hybrid model, but don’t want to spend money on unused space.
“There is no going back to pre-pandemic times,” Dixon told Fast Company. “I can say with certainty that the geography of work has changed permanently, and the office is far from dead, it has merely moved to a much more convenient location, close to where people actually live.”
Meanwhile, other CRE owners are changing their vacant offices into different spaces altogether—turning them into hotels, residential areas and mixed-use spaces.
David C. Smith, Head of Americas Insights, Global Research, at Cushman & Wakefield, notes fully repurposing empty offices is one of the most cost-efficient ways to increase their value.
“Repurposing will make sense in a small portion of the office inventory but can provide relief on the margins for the office market and for other sectors that are currently constrained, for example, housing in many cities,” he said.
CRE owners who are willing to change with the times today are more likely to still be in business tomorrow. Regina Stilp, founding principal at Farpoint Development, noted leasing at her company is slower following the pandemic, but she remains optimistic that people will want to return to the office at some point.
“Everyone loves to say the office is dead, but there is nothing else for learning a field or craft like collaboration or building relationships like face time, and you can only get those interactions in an office setting,” she told Fast Company. “I think the pendulum will swing back—not to a full 180 degrees —but definitely close to it.”