The commercial real estate market is facing a seismic shift as many office buildings grapple with maturing debt and the enduring impact of remote work. This perfect storm is leading to a surge in distress, with some underperforming properties nearing vacancy rates of 80%.
As a result, real estate experts predict a wave of fire sales and subsequent office-to-apartment conversions. This transformation could provide a much-needed boost to the housing supply.
Richard Barkham, chief global economist at CBRE, forecasts a significant upheaval in Class B office buildings, often older and in need of renovation. These properties are particularly vulnerable to the current economic climate, and many may face demolition or conversion.
Banks are already beginning to shed troubled office properties from their balance sheets, and the number of office-to-apartment conversions has skyrocketed in recent years. John Vavas, a real estate finance attorney, notes a significant increase in such deals since the pandemic.
While office-to-apartment conversions can be costly and complex, they present a viable option for landlords facing underperforming assets. The potential benefits include increased demand for residential housing and the revitalization of urban areas. However, the process is likely to be gradual, with visible signs of change taking several years.
As the office market continues to evolve, the future of many commercial properties remains uncertain. The shift towards remote work, coupled with economic pressures, is creating a new landscape that will undoubtedly shape the future of cities and the built environment.