The landscape of office real estate is shifting, driven by the rise in remote work. This shift, accelerated by the COVID-19 pandemic, has brought about a rethinking of traditional office spaces, influencing their design, location, amenities, and even their continued use as offices.
It’s vital for real estate investment professionals to stay in the know regarding these changes and trends, so that you can adapt your investment and management strategies to appeal to forward looking investors and maximize returns by investing in the most desired asset classes.
Redefining Office Design for Hybrid Work
The adoption of hybrid work models, where employees have the option to work part of the week from home and partly from the corporate office, has led to significant changes in office design. Traditional office layouts, characterized by fixed desks and private offices, are giving way to more flexible and collaborative environments. Companies are increasingly adopting open floor plans with designated areas for hot desking, collaboration rooms, and wellness spaces.
Flexible Workspaces
The demand for coworking spaces and flexible leases has surged as companies seek to provide team members with adaptable work environments. These spaces offer the flexibility to scale up or down based on the company’s workforce needs, a crucial factor in today’s business environment.
Amenities for Wellness and Collaboration
To remain desirable, modern offices are incorporating amenities that support wellness and collaboration. Features such as fitness centers, wellness rooms, and high quality meeting spaces with high-tech video conferencing capabilities are increasingly common. These amenities are designed to attract employees to the office by providing benefits that can’t be replicated in a home office, while also serving as a selling point for property owners who wish to make their properties stand out in a crowded, yet slowing market.
Shifting Location Preferences
The shift towards remote work has significantly impacted location preferences for office spaces. Urban centers, once hubs of business activity, are experiencing higher vacancy rates as companies reevaluate the necessity of a central office location.
Urban to Suburban Shift
Many companies are exploring suburban and secondary markets, driven by employees seeking more affordable and spacious environments. This migration, along with many companies switching to a purely remote model, has led to a glut of underused office buildings. Major business hubs with high concentrations of office buildings — like New York and San Francisco — are seeing a rise in vacancy rates and declining rents. However, this also presents an opportunity for urban revitalization and potentially more affordable housing through the repurposing of office buildings into residential or mixed-use properties.
Office to Multifamily Conversions
One of the most significant trends in the current real estate landscape is the conversion of office buildings into multifamily residential properties. This adaptive reuse addresses both office oversupply and housing shortages in many urban areas, and efforts are already underway by introducing new financial incentives, amending building codes, and reconsidering zoning and land use policies. Boston and Minneapolis, for example, are offering tax incentives of up to 75% to developers who repurpose office spaces for residential use, especially when these projects align with affordable housing and sustainability goals. New York City has created an “Office Conversion Accelerator” division within its government, designed to streamline the permitting process and assist developers with conversion projects efficiently.
But converting an office building to a multifamily property is not as easy as it sounds. Office buildings are typically designed very differently from residential buildings, for example:
Large Floor Plates
Office buildings often feature large, open floor plans with expansive interior spaces, versus residential units which require smaller, more segmented spaces to create individual apartments. Dividing large floor plates into smaller, functional living spaces can be complex and require significant architectural changes.
Deep Interiors
Many office buildings have deep interiors with large distances from windows. Residential units, on the other hand, need greater access to natural light and ventilation. Making sure each apartment has enough windows and natural light often requires cutting new windows or completely redesigning the building’s layout, which can be structurally and financially demanding. A recent Associated Builders and Contractors analysis of the U.S. Bureau of Labor Statistics Producer Price Index data finds that construction costs have increased 39.5% since February 2020.
Central Cores
Office buildings usually have centralized cores that house elevators, stairwells, restrooms, and utility shafts. Reconfiguring the core to suit residential needs can be a major undertaking.
All this, however, is not to say that it can’t be done. Successful office to multifamily conversions have already taken place. Examples include Park + Ford in Washington D.C. and The George in Wheaton, Maryland.
Implications for Real Estate Investment Managers
While the market and corporate needs are changing, office real estate is certainly still a viable investment. After all, 43% of investors surveyed for the 2024 AppFolio Real Estate Investor Report plan to continue to invest in offices. Investment managers just have to know what assets are desired, and right now, renters of office real estate want newer Class-A buildings with modern amenities. Data from Avison Young’s Q2 U.S. Office Report shows that Class-A offices from the 2010’s and later have a 15.5% availability rate, while Class-As built in the 2000’s have a much higher availability rate of 27.8%. The overall availability of office space nationwide is 23.7%, a record high.
The evolving dynamics of office real estate due to the rise of remote work have far reaching implications for real estate investment managers, who need to understand these trends in order to make smart investments. These trends include:
- The flight to quality, in which newer class-A office buildings with flexible and collaborative work environments and modern, luxury amenities will continue to perform well
- The rise of office to multifamily conversions, where dynamics outside of vacancy and cash flow will determine investment viability
By understanding and adapting to these changes, real estate investment managers can continue to perform at the top of their game and exceed client expectations.
