HomeReal Estate NewsCommercialExec: Office buildings are going to get ‘hit hard’

Exec: Office buildings are going to get ‘hit hard’

Navigator CEO Taylor Odegard gave a less-than-optimistic prediction for the office towers located in central business districts (CBDs) and major urban areas, GlobeSt.com reports. “From a valuation standpoint, (office buildings) are going to get hit hard,” Odegard told GlobeSt.com at the CREtech 2022 show in New York. “There’s going to be a very different underwriting process on how they come up with valuations and cap rates for these big buildings.

“I don’t think we’re facing a catastrophe; I think we’re facing a moment where the commercial real estate industry is fundamentally going to change. It’s going to change the way we operate, the way we lease space and what we build.”

Odegard, whose company produces a proptech data visualization tool that offers advanced predictive analytics, believes the number of flexible offices will increase. He noted the model will become more prevalent as people work in environments with no assigned desks.

Meanwhile, the traditional office CRE owners will have no choice but to adapt, Odegard said. The old five, 10 and 15-year leases can’t be as rigid as they once were — they’re going to have to be more elastic.

Why change is coming to the office CRE sector

The COVID-19 pandemic has had an impact on the CRE industry, especially when it comes to office buildings. Many companies have opted to continue their remote work environment even as buildings have reopened, while others have adopted the hybrid model, where employees only come to their respective offices part of the week. As a result, building owners and tenants find themselves with differing priorities, according to Odegard.

“It’s all about work-life balance; we’re never going to see people driving an hour back to the office anymore,” he told GlobeSt.com. “You’ve got landlords who want tenants in the building paying rent, and then you’ve got the occupiers who know they can have better margins, better earnings before interest, taxes, depreciation, and amortization (EBITDA), with people working at home, with less of an office footprint and less lease overhead on the business.”

Businesses that embraced remote work have done so in part because they can retain their team but reduce their costs. Additionally, employees save time during the day because they don’t have to commute, which has made them more productive.

Another issue is the ground-floor and retail tenants in these CBD office towers didn’t pay rent during the pandemic. The same was true of gyms that leased entire floors, Odegard said. A lot of these tenants didn’t return and collections are on the rise.

The future of the traditional office

Traditional, larger CBD office towers are seeing their physical makeup change as well, Odegard told GlobeSt.com. Tenants have cut their office footprints down to approximately 20 to 30 percent of what they were before. Going forward, tenants might downsize and move away from their CBD location rather than renew their lease.

“For the next two years, offices will be a highly depressed asset class,” he said. “There are still new office buildings that are empty.”

When asked what will replace these traditional office towers in CBDs, Odegard noted revolutionary changes could be coming.

“We’ll see the real birth of a live, work and play tower,” he told GlobeSt.com. “The future of downtown core buildings will no longer be single use; they’ll be true mixed-use assets able to diversify their tenant base. The tenants will be better able to have a live, work and play experience in a single asset.”

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