Turing vacant offices into spaces other industries can use has been a common suggestion to address the impact the COVID-19 pandemic had on the office sector. However, a recent CBRE analysis revealed that turning these empty office spaces into homes, hotels or life science spaces would only remodel 2 percent of the 4 billion square feet of office space in the U.S., The Real Deal reports.
Currently, the national office vacancy rate is more than 17 percent — an almost 30-year high, according to CBRE. Meanwhile, the study said that several factors have to fall into place in order to successfully convert the 85.7 million square feet of office space that’s ready to be changed.
How the building works structurally is a big factor. Offices don’t necessarily have to have windows; an apartment building would, however. Unfortunately, many of the older office properties with the lowest occupancy rates have floor plates that are too large to get windows in every unit.
Developers coring a building so light can reach interior units or using the middle of a property for amenities or storage space are potential solutions to these issues, according to CBRE’s study. However, these fixes are usually expensive and eliminate some living space. Additionally, a building would need to be discounted if a developer is going to take on an expensive reuse project.
“Our capital markets expert said the sale price has to fall below $100 per square foot to really make the deal work,” CBRE’s office research head Jessica Morin said.
Right now, office buildings aren’t trading near that price point, The Real Deal reports. Office property sale prices have gone up every year since the pandemic began. The average price per square foot is currently closer to $300.
Office conversion activity has increased during the third year of the COVID-19 pandemic, however. Between 2016 and 2021, there were 206 office transformations, or 34 a year, according to CBRE. In 2022, developers have already completed 38 and another 21 are still scheduled to be finished by the end of the year. Currently, 76 conversions are already scheduled for 2023.
Macroeconomic headwinds could shift some of those timelines, however, according to the study. It’s been more expensive to finance construction due to increased interest rates and the uncertainties surrounding work culture. The combination has slowed office development, The Real Deal reports. It’s expected that some developers will hold off on any office conversion projects until these industry conditions improve.