So what's going to happen to all this office space?
The office market is in trouble, and it's only going to get worse. If residential conversions aren't the savior, what might be?
Thesis Driven dives deep into emerging themes and real estate operating models. This week’s letter explores possible outcomes of the sinking office market, including alternative uses, conversions, and more.
You don’t have to be a remote work cheerleader to admit that the office market having a bad time right now. JLL headlined “mounting cyclical challenges” to the office category in their most recent office market outlook report. Related CEO Jeff Blau was less euphemistic when he recently told Class B office owners to “take what you can and run.”
It is hard to find silver linings in recent office data. JLL concluded that office vacancy topped 20% in Q1, the highest in recent memory. Some individual markets are far worse; for example, the San Francisco, New Jersey, and Houston office markets are all more than 25% vacant. And as we’ll discuss later in this letter, the situation is likely to get far worse as in-place leases roll.
While there is little disagreement that the office market is feeling pain, there is far less consensus on what comes next. Various alternatives are floated, as are apocalyptic renderings of abandoned city centers and prognostications of doom.
This week’s letter will dive into the state of the office market and make a few predictions. Specifically, we’ll tackle:
A more detailed look at the state of the market and why prices haven’t “unstuck” yet despite record vacancy;
An overview of alternative uses of traditional office space including managed / flex office, residential conversions, and other uses;
An analysis of the financial viability of alternatives;
Predictions of where the market will end up and when it might end up there;
What this all might mean for cities.