1.4B SF Of U.S. Office Will Be Obsolete By 2030, Cushman & Wakefield Predicts

[DCReid]

https://www.bisnow.com/national/news...redicts-117813

One of the biggest questions hovering over the challenged office market has been: Just how much space is never going to be leased as an office again?

In a new report released this week, commercial real estate services giant Cushman & Wakefield estimates that number will be roughly 330M SF by the end of the decade.

There will be more than 1.1B SF of vacant office space in the U.S. by the end of the decade, C&W researchers estimate, nearly a third of which they categorize as “excess vacancy" as a result of remote and hybrid work shifts. As a result, the national vacancy rate is expected to be 55% higher than it was in 2019.

Presently, trouble in the market is concentrated: Buildings with vacancy rates of 50% and higher made up 7.5% of the total inventory in the U.S., according to C&W. If those buildings were removed from the market, the national office vacancy rate would fall from 18.2% to 12%.

But by 2030, as much as 25% of all U.S. offices — roughly 1.4B SF — is “growing increasingly undesirable and will need to be reimagined and made relevant for the future,” the report found. It called these buildings "functionally obsolete."

Cushman & Wakefield classifies roughly 60% of all office stock as “facing competitive obsolescence.” To survive, the brokerage said, the owners of this collective 3.4B SF of office space will need to make significant investments into their properties.

The brokerage expects to see office vacancies continue to rise over the course of the decade. Just one-third of leases due to expire by the end of 2029 have expired, leaving further to fall for the office leasing market across the country.

Employers across the country are increasingly mandating more strict hybrid work policies, with Amazon recently setting a requirement of three days of in-person work per week for office workers.

But that hasn't stopped them from reducing their office footprint. The average office lease renewal or extension transaction was 28.7% smaller in 2022 than in 2019, according to a Trepp/Compstak study released this week.

Signs of trouble are already apparent among transactions in the office sector, with major markets across the country seeing a rise in subleasing, downsizing, difficulty refinancing and potential conversions. There are also increasing instances of sophisticated office owners like Brookfield, Blackstone and Related Cos. handing the keys of underperforming properties over to their lenders.

[ocman]

How many housing units would that make? Imagine the housing crisis solved in SF despite itself.

[mhays]

If SF had 10,000,000 sf of office-to-housing conversions over 15-20 years that would be truly massive. That might total 10,000 units assuming units of 800 sf, which would be more like 1,000 sf gross.

Even with SF's low volumes of multifamily, new construction should be quite a bit more common.

[BigDipper 80]

On other, less urbanism-oriented forums, I keep seeing folks saying that it's "impossible" to convert San Francisco's office space into apartments because the "floor plates are too large". Even when I show them the stuff that Cleveland and Detroit have pulled off, they just double down and say it could never work in San Francisco. It's such a weirdly provincial city.

Luckily out in the Rust Belt, most of the corporate office space left downtowns around 2008, so the industrial heartland is ironically now ahead of the game with regards to downtown revitalization compared to their coastal counterparts.

[iheartthed]

Originally Posted by BigDipper 80

On other, less urbanism-oriented forums, I keep seeing folks saying that it's "impossible" to convert San Francisco's office space into apartments because the "floor plates are too large". Even when I show them the stuff that Cleveland and Detroit have pulled off, they just double down and say it could never work in San Francisco. It's such a weirdly provincial city.

Luckily out in the Rust Belt, most of the corporate office space left downtowns around 2008, so the industrial heartland is ironically now ahead of the game with regards to downtown revitalization compared to their coastal counterparts.

In Detroit they've only converted older buildings to residential. There's only one postwar building that I know of that is potentially being converted to residential, and I think that project is currently stalled(?). That said, San Francisco would probably have a much easier time converting older commercial stock to residential since land values are expensive already. Detroit tore down so many older buildings because the land value did not support the cost of rehab. That's still an issue even today.

Chicago has demonstrated some success in rehabbing postwar towers like the John Hancock.

[chris08876]

Hopefully a bulk of this is in the suburbs. Office complexes in the burbs take up an asinine amount of space. But offers a good conversion opportunity for much needed housing.

[mhays]

Originally Posted by BigDipper 80

On other, less urbanism-oriented forums, I keep seeing folks saying that it's "impossible" to convert San Francisco's office space into apartments because the "floor plates are too large". Even when I show them the stuff that Cleveland and Detroit have pulled off, they just double down and say it could never work in San Francisco. It's such a weirdly provincial city.

Luckily out in the Rust Belt, most of the corporate office space left downtowns around 2008, so the industrial heartland is ironically now ahead of the game with regards to downtown revitalization compared to their coastal counterparts.

They're correct that large floorplates make it very difficult. How does an apartment use space that's 50' from a window, and get any rent for it? Light wells are often basically impossible depending on the building, particularly for anything tall.

What you might consider "provincial" is often the actual experts talking. I'm not an expert, but I work with a lot of them who say similar things. Seattle isn't getting a lot of conversions either.

[eschaton]

Originally Posted by mhays

They're correct that large floorplates make it very difficult. How does an apartment use space that's 50' from a window, and get any rent for it? Light wells are often basically impossible depending on the building, particularly for anything tall.

What you might consider "provincial" is often the actual experts talking. I'm not an expert, but I work with a lot of them who say similar things. Seattle isn't getting a lot of conversions either.

You can use part of the core for shared amenities on a floor, like laundry rooms and gyms, but there's a logical limit to what can be accomplished.

[mhays]

Originally Posted by chris08876

Hopefully a bulk of this is in the suburbs. Office complexes in the burbs take up an asinine amount of space. But offers a good conversion opportunity for much needed housing.

Everything I hear says these will be teardowns in most cases. They'd generally need to be gutted down to structure anyway, and the structures tend to be far too wide and also unnecessarily tall floor-to-floor. Historic protections won't get in the way in most cases. Renovations often cost more than new construction, so why do it if there's no real advantage?

[chris08876]

^^^

I do wonder though in this day in age with the way pricing is for materials, if the actual conversions would offer a better ROI versus the process of demo, than foundation if applicable, if not using the existing foundation and starting all over.

I suppose it depends on how the cost of labor and materials manifests in the next 6 years. But to your point, I think it will be case by case. Some depending on the year built, if older stock, could be a pain to convert to 2020 standards, to a standard demanded by todays market but might not be so much more for newer office stock (after 1995).

[mhays]

Originally Posted by eschaton

You can use part of the core for shared amenities on a floor, like laundry rooms and gyms, but there's a logical limit to what can be accomplished.

That could solve one floor, though both tend to be on the perimeter due to windows for the gym and venting for the laundry, and nice buildings don't have laundry rooms to begin with.

Big storage lockers can fill some space, but that'll get a fraction of its cost back in unit rents.

In an expensive city, it might be better to be 80% leased at office rates than have the central 5,000 sf of each floor get basically no return.

[mhays]

Originally Posted by chris08876

^^^

I do wonder though in this day in age with the way pricing is for materials, if the actual conversions would offer a better ROI versus the process of demo, than foundation if applicable, if not using the existing foundation and starting all over.

I suppose it depends on how the cost of labor and materials manifests in the next 6 years. But to your point, I think it will be case by case. Some depending on the year built, if older stock, could be a pain to convert to 2020 standards, to a standard demanded by todays market but might not be so much more for newer office stock (after 1995).

The amount of materials (or energy) might not be a major advantage for renovations. Since offices tend to be about 3' extra height per floor, that's a lot of wall (etc.) to build, and a lot of extra space to heat and cool. It would depend on how much of the building you're saving (often more saving means less operational efficiency), the time horizon you're counting for operational issues, etc.

[Crawford]

Originally Posted by BigDipper 80

On other, less urbanism-oriented forums, I keep seeing folks saying that it's "impossible" to convert San Francisco's office space into apartments because the "floor plates are too large". Even when I show them the stuff that Cleveland and Detroit have pulled off, they just double down and say it could never work in San Francisco. It's such a weirdly provincial city.

I'm trying to think of a Detroit building with large floor plates that was converted to residential. Can't think of any. They all pretty much seem to be narrow towers that had been abandoned.

Residential isn't a panacea. Office building conversions usually result in weird floorplans and inadequate windows/light. Fat buildings probably need radical reconstruction, with a new courtyard or something. Then the end product might not be as valuable as the previous office use. There are also legal issues, as many of the conversions I've been in have illegal bedrooms, are illegally being used for commercial purposes, etc. They also seem less likely to attract families, and often have a dorm/transient feel. It's an option, of course, but very case-by-case.

[eschaton]

Originally Posted by mhays

That could solve one floor, though both tend to be on the perimeter due to windows for the gym and venting for the laundry, and nice buildings don't have laundry rooms to begin with.

Big storage lockers can fill some space, but that'll get a fraction of its cost back in unit rents.

In an expensive city, it might be better to be 80% leased at office rates than have the central 5,000 sf of each floor get basically no return.

Office conversions aren't going to be top-of-the-line in terms of rent prices anyway. Dealing with an existing shell will keep construction costs lower than new residential, and the non-ideal floor setup will result in awkward apartments which often only have one nice window set.

I've said before in other threads I'm suspicious how much of a market there is to live in a pomo glass box as well. I'm sure it appeals to some people, but I think the "downtown living" contingent will find conversions of prewar elevator buildings (or new build) far more attractive.

[Crawford]

Originally Posted by eschaton

Office conversions aren't going to be top-of-the-line in terms of rent prices anyway. Dealing with an existing shell will keep construction costs lower than new residential, and the non-ideal floor setup will result in awkward apartments which often only have one nice window set.

I've said before in other threads I'm suspicious how much of a market there is to live in a pomo glass box as well. I'm sure it appeals to some people, but I think the "downtown living" contingent will find conversions of prewar elevator buildings (or new build) far more attractive.

Yeah, I don't think this is the panacea for American CBDs. There will be residential conversions, of course, but very case-by-case. If I'm a building owner with a struggling building, it would seem much safer to wait things out than plan a gut residential renovation. Narrow, historic towers that are mostly empty would be exceptions.

[mhays]

Agreed about pre-war buildings. The market values these more due to floorplates and also architectural quality. Some even get a rent premium, which contrasts to their inability to get high office rents due to the floorplate issue.

[badrunner]

I'm pretty sure a vast majority of that 1.4B sf in office space is in postwar towers, which means a lot of narrow units and windowless rooms. That kind of takes the shine off urban living...

[mhays]

Yeah, a lot of 40x15' units with a semi-enclosed bedroom, which only works when nobody needs privacy.

[LAsam]

I suspect a lot of Class B and Class C office will soldier on until the owner/lender are finally willing to concede that their capital is a lost cause and not going to rebound. At that point, the buildings will come down and be replaced with product that's in higher demand.

[MayDay]

Fwiw, the notable office buildings in Cleveland that have been repurposed for residential (partially or completely):

The 9 (formerly Cleveland Trust Tower)


55 Public Square


The Standard


1717 East Ninth Street (formerly the East Ohio Gas building)


The Leader Building


75 Public Square


The Halle Building


The Statler


Now, the next in line...

Currently under renovation and the youngest of the office tower/residential conversions (built in 1983), The Bell (formerly Ohio Bell Building);


The Centennial (925 Euclid) - once completed would deliver over 800 residential units. Financing is coming together on this one so thinking it will happen sooner than later.


Landmark Office Towers - currently the headquarters of Sherwin-Williams. Once they move operations to the new tower under construction, it's been widely rumored this will be a prime candidate for conversion to residential.


Ohio Savings Plaza - the latest to be up for sale, sounds like there's strong interest given its central location, connected parking (ugh, but a desired amenity in Cleveland).