The Entrepreneurial Opportunities for Reimagined Business Space

This is the third and final installment in our three-part Big Picture series, Preparing for and Profiting from the Office Real Estate Apocalypse, by Mark Markuly . If you are new to this series, get more context by catching up on Part 1 and Part 2.

When the demand for office space goes through the kind of cultural transformation brought on by a multi-year pandemic, the purpose, necessity, and volume of commercial real estate undergoes reassessment. As any entrepreneur knows, such evaluations often result in losses but also open opportunities, and there are three examples already worthy of reflection.

Office Space as Supply Chain Facilities

The first deals with the otherwise diminishing office space needs in the tech industry. While on-site working space for employees has diminished, the pandemic also brought e-commerce into an unprecedented position of power, influence, and market share. This transition has materialized new kinds of square footage needs, and some investment firms are taking significant risks to capitalize on the projected demand.???

In January of 2022, CBRE Investment Management , a real estate colossus with $133 billion in assets and $35 billion in global industrial property, bought an international real estate portfolio valued at $4.9 billion. The acquisition was one of the largest single purchases of industrial properties in history. Tellingly, this purchase included 28 million square feet of distribution centers, warehouses, and logistical facilities located in the United States, Germany, the United Kingdom, and Poland.

CBRE is gambling that the pandemic has dramatically and irrevocably changed one aspect of e-commerce – the structure of the supply chain. Traditionally, supply lines were built on the premise that it was important to minimize the number of stops a product made on its way from the manufacturer to the consumer.

However, during COVID, when people were afraid to go into stores to pick up what they wanted when they needed it, it became increasingly important to have commodities located regionally for easy and quick distribution to the consumer. Consequently, the supply chain under the new conditions requires more warehouses, distribution centers and logistic facilities.

CBRE saw opportunity in commercial real estate that most did not, but they were not alone in bringing entrepreneurial vision and energy to troubling industry metric. A second creative re-imagination of commercial real estate needs was found in responding to the research incentives brought by COVID to the biotechnology field, an economic sector with access to $70 billion in private and public capital investments in North America alone.

Office Space as Laboratories

Even during the lockdowns, the growing space needs of the life sciences spurred the conversion of a significant amount of office space into laboratories. It is estimated that 20 percent of the laboratories getting built in the U.S. are office space conversions.

In Boston, for instance, 30 percent of the 7.8 million square feet of planned lab inventory in the city were based on converting vacant office footprints, while New York city had almost two million square feet marked for such conversion. This kind of transition is expensive and has special needs, such as easier access to much larger volumes of water and electricity than needed for normal office space, unique loading dock specifications and sometimes even special structural engineering to accommodate the load for certain types of equipment.

But the expenses are often justified and one of the major office-to-lab conversion benefits in cities like San Francisco, Chicago, Boston and Raleigh, N.C., is that such outfitted laboratories garner significantly higher rental fees. These heath science tenants are also often stickier than other renters, and property management firms can escalate the rents for laboratory space at a much higher percentage than the market will bear for typical office spaces.?

Office Space to Living Space?

A third entrepreneurial venture with commercial real estate is the conversion of office to living space. This is nothing new for those familiar with the loft conversion movement, which began in the 1970s when manufacturing parts of New York City, like the Soho neighborhood, converted buildings designed for manufacturing into trendy living units. The Loft movement spread across the larger urban areas of America and is still occurring.

However, conversions of traditional office space poses significant hurdles, particularly with architectural and legal issues. There are often zoning and building code challenges, such as limitations on multiple dwelling, that need business-government partnerships. In commercially designed high rise buildings it is difficult to build some of the units with natural light. Electrical, water and plumbing problems are common since residential spaces have different needs than offices. But entrepreneurs are convincing cities to find ways around these limitations.??

New York, for instance, is considering a fast track for getting around its own rules (How an Empty office Becomes a Home, Stacey Vanek Smith, Adrian Ma,?The Indicator: Planet Money, NPR, March 23, 2022). The city has a new “Adaptive Reuse Task Force” which is tasked with recommending building regulatory changes that would allow (if not incentivize) the conversion of outdated office buildings into living space.

Chicago is offering tax credits and incentives for the transition of buildings with high vacancy; California has earmarked $400 million in 2023 for office-to-residential conversion grants. The mayor of Washington D.C. is proposing a 20-year tax abatement to generate more enthusiasm for conversions. About four million square feet of office space in downtown DC is already in the process of transition from office to home space, or under evaluation for such conversion.

Some cities are only in the early stages of considering this repurposing of office space. Denver has allocated money to study the issue and in Los Angeles, a 2022 Rand Study identified 2,300 “potentially underutilized commercial properties” that could feasibly convert into between 72,000 and 113,000 units of housing in Los Angeles County (Can Adaptive Reuse of Commercial Real Estate Address the Housing Crisis in Los Angeles?, Jason M. Ward, Daniel?Schwam,?Rand Corporation).?

America’s national housing shortage offers a significant incentive for converting offices into homes. A Freddie Mac report issued in 2021 estimated that the United States was short 3.8 million housing units in 2020, a dramatic increase from the 2.5 million unit shortage in 2018.

But entrepreneurs are already responding in systematic ways. Between 2020 and 2021, 41 percent of the national efforts to convert non-residential buildings into apartments has happened with old office spaces.

Some development and construction companies are specializing in such conversions. Clockwork Architectural Designs in Kansas City, for instance, touts expertise in changing office space into “Flashcube Luxury Apartments”.

These urban conversions come with single to multiple bedrooms and feature oversized double-paned windows for more wide-angle urban skyline views. In areas that are limited to natural light, such as in the middle of floors, the space is converted into indoor basketball, tennis and pickleball courts, 24-hour gyms, rock climbing walls, or game rooms.?

Rethinking the Relationship between First, Second, and Third Places

In the next few months, the impact of the issues surrounding the commercial real estate downturn will become more apparent to American society. However, it provides another opportunity for the United States to rethink the relationship between the first, second, and third places in the lives of the American working force.

In the 1996 edition of Ray Oldenburg’s Great Good Place, the author noted that reimagining these third places exists on “behalf of community, public conversations, and civicism. It is for those who believe in a public life and the need to restore it.” (Great Good Place, Oldenburg,?xiii.)?

Oldenburg realized that some people wanted to extricate themselves from the tensions that are inherent in any community, but many others were hungering for the benefits of living a common life in an urban environment. Those seeking isolation, he argued, did not have the right to determine the level of engagement other have with each other.?

The impact of the dramatic downturn in American office space will become unavoidable in upcoming months and will rippled through the economy and disrupt the post-COVID recovery. Entrepreneurs are already working on ways to reimagine the millions of square footage of empty office space. However, the magnitude of the problem will require changes in urban zoning laws, incentives for creative concepts, and new kinds of partnerships to enhance development.

No matter what happens, this issue of staggering levels of empty office space is about to hit the fan for the culture, and especially for the economy.?

Additional Reading

The Death and Life of Great American Cities, Jane Jacobs.?

The Living City, Roberta Gratz?

The Heart of Our Cities, Victor Gruen??

Back to the Drawing Board, Wolf Von Eckardt?

Streets for a People, Bernard Rudolfsky?

The New Urbanism, Peter Katz?