Source: https://www.mckinsey.com/industries/real-estate/our-insights/americans-are-embracing-flexible-work-and-they-want-more-of-it

That doesn’t bode well for those who own office space. Their already partially empty offices are going to decline as a result. 

To make matters worse, office spaces aren’t 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 that’s not worth the investment. 

Other asset classes

In a perfect world, a tanking office space asset class would be an isolated, contained issue and wouldn’t affect multifamily, retail, industrial, etc. Unfortunately, that’s not always how these things play out.

We recently interviewed renowned investor, Neal Bawa (watch here), and his thoughts on the office space “apocalypse” were eye-opening. 

“Multifamily properties that are dependent on downtown type, high-density environments where there’s 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 let’s assume San Francisco is the best example, right? A building just sold in San Francisco for 20% of its 2019 appraised value. So what’s happening right now in San Francisco? Well, the occupancy is now basically in the 70s and it looks like it’s heading toward low 70s. Breakeven point is somewhere in the 86 or 87% range, so basically everyone’s bleeding or highly bleeding or ridiculously bleeding. And so what happens to condo prices? So what happens first is in the downtown, it’s 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 it’s central business district, also called CBD‘s, 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%”.

What now?

While the office space sector doesn’t 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. 

In the meantime, the office “apocalypse” 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.

In many cases, we’ve found that it usually is.