My Long-Term Prediction of The Office Market
I’ve been making predictions of the office market in my newsletter, now in its 43rd year of publication. My predictions have almost always come true, and these can be substantiated through my published back issues. There will be several varying factors that will be part of how our office space market stabilizes, and unfortunately with several unpleasant consequences. According to a new study out by CBRE, national office vacancy hit a 30-year high of 17.8% in the first quarter of 2023 and is expected to increase to 20% before the market begins to turn around. “The commercial real estate services giant doesn’t envision office vacancy returning to the 12% level where it sat before the pandemic by the end of this decade, if at all.”(Bisnow June 1, 2023). Here are my predictions. About 10% of all office buildings may be candidates for conversion to residential or hotel. These would be mostly older buildings with operable windows and smaller floor plates and will depend on local governments facilitating the zoning and approval process. Another group of office buildings, usually 1-3 stories, will be purchased by residential developers and torn down to make way for housing. In San Ramon’s Bishop Ranch BR6, 535,000 sf of Class A office space, was recently demolished and is now under construction for housing. There are many other office buildings around the United States in this category, and tenants who will be forced to vacate will find space in nearby office buildings, thus increasing the occupancy rates. There will be lenders of troubled office buildings who rather than go through the sometimes-cumbersome foreclosure process will sell their mortgage notes at a discount. Investment groups are already being formed to purchase these deep-discounted mortgages and have a purchase basis low enough to invest money in tenant improvements and concessions to get the building leased up and operating with a positive cash flow. Some buildings will become obsolete and torn down to most likely replaced by some type of residential development. For larger office parks we are hearing of demolition and replacement with warehouse and industrial development. I’ve never experienced passing a kidney stone, but I have heard it can be extremely painful, and that is what our next 5-10 years for the office industry may feel like. We will get through this!
