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Remote Work May Leave 267 Million Square Feet Of Office Space Vacant
How durable is the shift to remote work? And how pronounced is the impact of that shift likely to be on office vacancies in the US?
The first question is hard to answer, which means the second one is too, but Goldman made a run at both in a note dated August 28.
Having tasted remote work, workers aren't necessarily keen to return to the office, or at least not five days per week. Given the still large mismatch between the demand for labor and the supply of it, many employers have little choice
I’ve been wondering about this topic, thanks H. On the surface, to me at least,it seems like a much larger problem than Goldman figures. I thought office vacancy rates were through the roof, and I can’t believe more office space was completed last year.
I can’t understand this either but anecdotally in the KC market I have seen a number of sizeable new office properties being added to the stock and immediately filled. Some of our large suburban spaces have changed occupants, but remain filled. Overall, it seems there has been a net addition of space here. We are not NY but property development is still moving along. Since COVID residential space has been booming with thousands of new rental and SF units added in large mixed projects.
I cannot give you attributions and names because we were given this info from a client. He runs a large property investment fund.
Because of his heft in the market he was invited to join an advisory board to one of the largest private investment companies, whose name most of you would know.
A few months ago folks on the board were told that they were preparing to mark down the valuations of their office holdings by 40%. No, not 4%. 40%.
When I return to work, I’ll have to check in with him. Over the years his observations have proven to be prescient.
While it would take a bit of work, particularly with reworking the plumbing, making some of that space “residential” probably would be a benefit and dare I say it – disinflationary.
Office-to-residential conversion for post-war buildings is very expensive and takes a long time (not just permitting/construction, ownership also needs to tumble down to a party desperate enough, with a cost basis low enough, for a large upfront investment followed by residential rents to be tolerable). The resulting units are unlikely to be disinflationary.
Pre-war buildings (smaller floorplates, openable windows, etc) are easier to convert. NYC did a big O-to-R conversion push a few decades ago and almost all the residential units produced were in pre-war buildings.
At least in my area, I think we’ll see office users migrate to better buildings at lower rents, leaving the Class C buildings vacant and defaulted. Those that can be converted to residential will be (hopefully saving a lot of nice pre-war structures), others will be zombie buildings until the next wave of development brings the demolition crews.
In my city, housing advocates dream of mass-converting office and mall buildings to affordable housing, homeless shelters, etc. They need to spend some quality time with a spreadsheet pro forma.