The Future of Office Space

Office owners managed to survive the pandemic mostly because most tenants have been locked into long-term leases. Approximately?$80 billion in loans?backed by these office assets will mature in 2023. Moreover, thousands of these leases will expire over the next two years. CRED iQ reports that, as pertains to office and mixed use.

Rising interest rates and tight credit are only aggravating these stresses, making refinancing these leases a challenge. Moreover, the declining value of office buildings threatens the stability of the?regional banks?carrying those mortgages on their books.

Office occupancy rates are something of the elephant in the room. But the room itself is something of a ghost town. Almost?65 percent?of American companies now require their employees to work in the office at least one day a week. Nevertheless, about?a fifth?of the country’s office space remains vacant. In fact, on an average workday, about?40 percent fewer?workers are reporting to the office than before the pandemic. This rate has held steady for nearly a year, suggesting that remote and hybrid working arrangements will become a permanent part of the office landscape.

High-end buildings in prime locations fared better through the pandemic than office spaces that are not as well-appointed. A flight to quality that began before 2020 accelerated in 2021 and early 2022.?Over the last three years, more than three-quarters of office tenants who moved either upgraded from Class B properties to Class A or switched from one Class A building to another.

Additionally, the demand for office space will undoubtedly be affected by advances in AI and automation technology that allow companies to reduce their workforces. Lower headcounts mean less square footage is necessary. Large, single-tenant towers may become dinosaurs that are replaced by smaller, multi-tenant buildings.

Employees have become used to the convenience of remote work. But even a cursory cost-benefit analysis reveals that working from anywhere is anything but all pros and no cons.

Employees are missing out on the synergy — the creative energy — of face-to-face interactions. The regular back-and-forth of ideas can’t be replicated in a weekly teleconference, but many employees need more incentives to return to their daily commute. They are looking for spaces that are comfortable, convenient, and offer a variety of amenities.

Although the challenges facing office properties are real, so are the opportunities for those willing to adapt to evolving market conditions. By focusing on quality, amenities, and location, property owners are more likely to find tenants, generate income (rent), and otherwise buoy the value of their assets.

It also helps to have a good working relationship with a commercial real estate appraisal firm. LPA’s CRE valuation experts work closely with both federally regulated and non-depository lenders and are uniquely qualified to produce USPAP-compliant appraisal collateral independent of the loan process. Contact LPA today at?https://lowerypa.com/locations/.