Your office is in brace position

Property is the world’s largest asset class, the world’s ‘most significant store of wealth’ and the undisputed champ of wrecking global economies. Although residential property makes up the vast majority of real estate wealth, the total value of commercial property is still $32.6 trillion (ref) - almost triple that of all the gold in the world (ref).?

As everyone working in climate tech has tattooed onto their chest: The earth is a finite resource. So, if you stick a building somewhere, that land cannot be used again. Scarcity equals value and, as long as our population has been increasing, there has always been a healthy demand driving the value of buildings perennially upwards.?

However, this isn’t exactly the case for commercial real estate. We will always need a building to live in, but will we always need a building for the other things we get up to??

We haven’t really needed a building to shop in for years. I wouldn’t normally reference the Daily Mail, but the photos in this article epitomise the death of the high street in the UK. 15 million square ft of empty retail space line town centres across the country (ref). Apart from the social and cultural impacts (and the quiet heartbreak I feel looking at those pictures of our community spaces), the economic impact is severe. For over a decade, physical retail has experienced thousands of job losses and store closures (ref) (RIP, Woolworths), with online shopping largely to blame for the ‘retail apocalypse’ (ref).

Because of the internet, we don’t need to go to a shop anymore. Throw in a global pandemic, and we also realised we don’t need to go to a physical space to work anymore either. Office buildings are the next asset class to be in the hot seat, and it ain’t looking good.

At the start of the year, US office vacancies hit a record 20.1% (ref), while the vacancy rate in the UK was 6.9% (ref). However, these figures hide the true figures of empty offices, because they only cover spaces that are no longer leased and don’t reflect the actual decline in office use (ref). Over 50% of workers in London are either fully remote or hybrid, with a significant chunk of workers doing the same across other UK regions (ref).

The economic tremors are beginning. $270 billion of commercial office loans are due in 2023, and the potential for defaults is high (ref). By 2026, $1.5 trillion of commercial mortgages will be due for repayment (ref). Blackstone, the world’s largest owner of commercial real estate, saw their profits plunge 36% since last year (ref), and responded by shrinking their office holdings to 2% - down from 60% (ref). And if this doesn’t remind you of the 2008/2009 financial crisis enough already, real estate is the most shortered market globally in 2023 (ref).

Having to contend with paying back mortgages from paltry rental incomes is bad enough, but the pain doesn't stop there for office owners. With new environmental regulation forcing buildings to become more energy efficient, Savills estimates that commercial landlords and investors globally will need $1.65 trillion to finance the green transition (ref).

Is it any surprise, then, that hundreds of office buildings in New York are being considered for residential conversion (ref)? Repurposing buildings feels like a perfect solution to solve two crises at once: the housing shortage and the freefall in commercial real estate valuations (ref).

But, change is hard, and the only ones who will survive will be those most adaptable to it. So, who will be able to change? And who won’t? It’s time to start taking bets.?

#realestate #retrofit #repurposing #greenbuilding #commercialrealestate