đ§ An Office Apocalypse?
Last Updated: September 5, 2o23


Steve Nabity
Want To Invest In Real Estate But Don't Know Where To Start?

đ§ An Office Apocalypse
Thereâs a scene from the movie âI Am Legendâ that made me shiver when I first saw it in theaters. Maybe you remember it. Following a worldwide apocalyptic event, Will Smithâs character walks down a New York City street. No one is around him. Itâs completely empty; devoid of all life (save for zombies, of course). Itâs haunting.Â
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Fast forward to real life today and weâre getting a glimpse of what Will Smithâs character might have been feeling – again, save for the zombies.Â
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Following the outbreak of Covid, office spaces were abandoned in favor of the safer work-from-home option. Many thought this would be shortlived once Covid was under control, but unfortunately for many office space owners, that fanciful notion soon evaporated.
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Weâre three-plus years removed from the start of Covid and office spaces are still 20-40% vacated nationwide. Thatâs not good.
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âWorstâ yet, some think itâs going to get even worse for office spaces⊠and maybe even other real estate asset classes.
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Office spaces
Letâs begin with office space. I think we can all agree that the work-from-home movement is here to stay. In fact, many believe that itâs going to grow!
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Source: https://www.mckinsey.com/industries/real-estate/our-insights/americans-are-embracing-flexible-work-and-they-want-more-of-it
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That doesnât bode well for those who own office space. Their already partially empty offices are going to decline as a result.Â
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To make matters worse, office spaces arenât easily converted into other real estate asset classes. For example, technically an office space could be converted into a multifamily asset. The problem (among many) is that office spaces and multifamily are governed by a different set of codes (think HVAC, plumbing, etc). To get an office to-code would be an EXPENSIVE endeavor – perhaps one thatâs not worth the investment.Â
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Other asset classes
In a perfect world, a tanking office space asset class would be an isolated, contained issue and wouldnât affect multifamily, retail, industrial, etc. Unfortunately, thatâs not always how these things play out.
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We recently interviewed renowned investor, Neal Bawa (watch here), and his thoughts on the office space âapocalypseâ were eye-opening.Â
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âMultifamily properties that are dependent on downtown type, high-density environments where thereâs a large number of offices that are going to be vacant are going to be affected. The impact actually is going to be two-step. So letâs assume San Francisco is the best example, right? A building just sold in San Francisco for 20% of its 2019 appraised value. So whatâs happening right now in San Francisco? Well, the occupancy is now basically in the 70s and it looks like itâs heading toward low 70s. Breakeven point is somewhere in the 86 or 87% range, so basically everyoneâs bleeding or highly bleeding or ridiculously bleeding. And so what happens to condo prices? So what happens first is in the downtown, itâs the condo prices, all these multi-million dollar buildings, they start getting affected first, because those condo prices are propped up by the office prices. And then that eventually waterfalls into the multi-family properties in the area, right? So itâs central business district, also called CBDâs, and downtowns – multifamily in those areas is going to be affected. The good news is only about 10% of the multi-family in the United States is in those areas. Those 10% are likely to see pretty drastic declines in value – could be as much as 40%â.
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What now?
While the office space sector doesnât look great in the short term, real estate owners are nimble and tend to find ways to adapt. Over time they should find creative ways to utilize unused office space.Â
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In the meantime, the office âapocalypseâ should remind us that no asset class is impervious to change and to thoroughly vet every investment opportunity that comes your way. Consider what could happen and if that risk is worth it.
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In many cases, weâve found that it usually is.
Want To Invest In Real Estate But Don't Know Where To Start?

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