The office market is in trouble. Here's what real estate experts say all that space could be used for instead.
Carlos Avila Gonzalez/San Francisco Chronicle via Getty Images and NurPhoto/Getty Images
- As remote work empties offices, landlords are exploring creative options for the space.
- Hotels, manufacturing facilities, and film studios have been floated as possible alternatives.
- Still, there are financial and physical hurdles to revamping offices into mixed-used spaces.
As remote work turns many offices into ghost towns, creative landlords are eyeing alternatives beyond the commonly touted approach to turning them into residential apartment buildings.
Work from home has proven to be a lasting legacy of the COVID-19 pandemic, and it's sent the office vacancy rate to record highs across the US. The reality facing office owners has many of them thinking about office-to-residential conversions, a move also echoed by the Biden administration as a way to alleviate the housing shortage.
But such redevelopment of office space is not easy, with Goldman Sachs saying in a recent note that the financing involved and the physical constraints of many properties make conversion to residential unfeasible.
Given the hurdles, real estate experts say some landlords are starting to think outside the box, eyeing anything from hotels, advanced manufacturing facilities, or even film studios as possible uses for hollowed out workspaces.
Mike Watts, CBRE's president of Americas investor leasing, said in an interview with Business Insider on Friday that the most popular option after residential buildings are hotels.
"You do see some office buildings right now that over the last 20 years have taken a part of their building like the low-rise and converted it to a hotel," he said.
According to Watts, hotels are somehow easier than residential projects to convert, particularly with a square floor plate, which allows for a more uniform interior layout and design features.
In suburban areas, Watts has observed advanced manufacturing space — which includes industries that focus on things like artificial intelligence, robots, and 3D printing — as a target for office landlords looking for alternate uses. The shift has gained momentum in markets like Austin, where owners have dumped their office buildings for light manufacturing and potentially incorporated a lab component into the space.
Old rural office buildings with three or four stories, large floor plates, lots of electricity, and plentiful parking are ideal for this type of conversion, Watts said.
"It's not a wave [yet] but you are seeing it and you didn't see it two years ago."
In less common cases, office owners in places like Los Angeles are pivoting their private buildings to film post-production sets.
Steven Paynter, a principal at architecture firm Gensler, told Business Insider that aside from housing, some of his clients are transforming offices into movie studio-type filming spaces, driven by the booming demand for video content in the US.
Medical offices are also options for landlords, Paynter said.
"Right now, it's a case of trying to figure out what people want," he added. "The market always shifts, there's always something needed."
Pitfalls to conversion
Real estate experts cautioned that there are still stumbling blocks for converting to mixed-use properties, though the obstacles are different than converting an office to residential.
From the standpoint of the physical space, turning an office into something else is a labor- and capital-intensive process.
"If you convert an office building to storage, for example, the fire risk goes up," Paynter said. "So the code requirements get higher, the structural requirements get higher, because people are packing loads of stuff in."
"It's very, very expensive because you're oftentimes going to have to add or rebuild the infrastructure in the building, meaning the plumbing, the electrical, piping, all those kinds of things," said Watts.
Both Watts and Paynter emphasized that residential conversions are still the most profitable choice for owners due to current housing valuations, but other experts said warehouses may be the closest proxy for big office spaces.
"With the seemingly endless need for warehouse properties in close proximity to large population bases, low density office buildings with surface parking fields can be a viable option for warehouses," Todd Henderson, co-global head of real estate at DWS Group told Business Insider on Friday, though he emphasized that zoning challenges are a hurdle to this kind of conversion.
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