Archives for March 2022

The vast majority of companies are taking a ‘wait-and-see’ approach before instituting major design changes to their offices to reflect its new purpose.

Corporate office tenants are likely to begin instituting renovations over the next few months as they gain a better sense of what employees expect out of a return to physical work⁠—but they’ll likely do so in small ways designed to have a big impact.

“In a hybrid world, the reality is that most spaces opened before 2020 are simply not designed to support new work dynamics and to fully enable innovation, collaboration, and socialization,” said Michael Casolo, Chief Revenue Officer at global workplace strategy, design and construction firm Unispace. “That being said, the vast majority of companies are taking a ‘wait-and-see’ approach before instituting major design changes to their offices to reflect its new purpose.”

In light of the fact that many workers now eschew the “old way” of physical work, Casolo notes that companies are initially starting with small, flexible design changes and seeing where they lead.

“For example, to smooth the transition between working from home and being back in the office, workplace designers are creating more intimate settings so that the space functions like an office but feels like a living room,” he says.  “And they’re not just installing new furniture to achieve this aesthetic. Organizations are also trying to replicate how employees moved through their day while working from home.”

That means tweaking space configurations to allow employees more space to move through offices in a “meandering way,” versus a traditional structure.

“You’re unlikely to find rows and rows of desks lined up anymore–instead companies are intentionally breaking up workstations with biophilia and clustering them in smaller groups,” Casolo says.

Unispace’s recent design project for Kroll in Chicago is instructive on this point: the company’s design team took a “neighborhood” approach to the company’s Fulton Market office that incorporated high, airy ceilings and positioned collaborative spaces like the boardroom and café along the perimeter. It also used daylighting and a green wall with hanging greenery to give the space a natural, warm vibe.

A report late last year from JLL takes a similar position, noting that mobility, technology-centric design, and a focus on wellness and sustainability will likely take center stage as office users test new designs this year and beyond.  The firm predicts that a permanent move toward virtual collaboration of some kind will require more conference rooms, huddle rooms, and flex spaces that allow for video calls, and says “the quantity of technology in an average office is forecast to continue rising, which will mean increased complexity to support a more robust technology suite.”

Casolo also says it’s also important to give employees a stake in redesigns⁠—especially as the race for talent (and retention) intensifies.

“The geopolitical and social upheaval of the last few years impacted some people more than others, with outsized negative impact on women, the socially disadvantaged and ethnic minorities,” he says. “Giving people who may not wish to return to the physical workplace due to past discrimination a genuine say in how they can do their best work in an office environment, post-pandemic is a key took to support organizations’ DEIB strategy. Spaces designed for a sense of belonging and inclusion highlight an organization’s commitment to make cultural change possible.”

Office fit out benchmarks for progressive space, which JLL defines as efficient open office floor plans with mostly bench style seating, no enclosed offices, and a high ratio of small huddle rooms, ranges from $155 per square feet for the base level to $181 per square foot for medium quality spaces and $224 per square foot for high-quality custom flex spaces specific to the end user, according to JLL research. Costs for moderate space consisting of “agile floor plans” composed mainly of workstations in an open setting and a moderate number of private offices and mid-sized collaborative workspaces, range from $159 per square foot for base, $190 per square foot for medium, and $232 per square foot for high-end offices. Meanwhile, traditional spaces heavy on private offices and big conference rooms range from $168 per square foot for base, $201 for medium, and $243 for high quality.

Source: “Office Tenants Likely To Make Small Design Changes For Big Impact As Workers Come Back“

Cost and time reductions in the 15% to 20% range often cited for adaptive reuse.

In general, adaptive reuse for commercial buildings is gaining favor due to its potential for higher returns, cheaper materials costs and being more economical compared to demolitions and having a reduced environmental impact on the area by much less hauling to landfills.

However, the economic factors affecting office-to-multifamily conversions are less straightforward than those associated with life science or medical office conversions, wrote Emil Malizia for NAIOP in a recent report.

He defined attractive markets for multifamily reuse as those where multifamily vacancies are lower than office vacancies, rent levels are at least comparable, and multifamily rent growth is expected to exceed office rent growth.

Recent trends portend continued strong demand for multifamily rental. Marcus & Millichap reports very strong performance of multifamily in the second quarter of 2021, with record absorption of more than 218,000 units, rent growth over 4% and vacancies down 70 basis points to 3.8%.

More Advantages than New Construction

In addition to being more environmentally sustainable, adaptive reuse projects realize several advantages over new construction,” Malizia wrote. “Although construction and development contingencies may be larger in anticipation of change orders, overall cost and time reductions in the 15% to 20% range or higher are often cited for adaptive reuse. Less construction time directly translates into lower development period risk.

“Labor costs constitute a larger share of total project cost for adaptive reuse projects than new construction since these projects use fewer new materials. [Because] the cost of materials has increased more than construction labor, construction costs for adaptive reuse projects have increased less over time than new construction projects.”

He wrote that in some places, older buildings have more market appeal than new construction because they help maintain the uniqueness and authenticity of an area.

“This public benefit has prompted modest subsidies for adaptive reuse in some jurisdictions,” according to Malizia. “Finally, because the building envelope exists, it is often possible to phase building occupancy as renovations are completed.

“If inspections can be completed and a certificate of occupancy issued, the renovated floor or part of the building can be occupied. The combination of less time to project completion and cash inflows from partial occupancy during construction have positive impacts on returns.”

Source: “The Case for Office-to-Multifamily Adaptive Reuse“

One clue: it’s going to be a demolish and build-from-scratch experience.

The good news in office space: occupancy has been on the rise. But any CRE professional watching the markets knows about the shoe that next drops—it’s going to take a good amount of time—11 quarters, according to Costar and the National Association of Realtors—for things to get back to normal and all the space to be absorbed. If it ever all is.

That leaves property owners and operators wondering what will eventually happen and how many workers will be dragged into traditional office space.

One hope is that space can be converted to other uses. An attractive possibility would be industrial, given how hot the sector has been. But the path from the particularities of office construction to warehouses and distribution centers is not so easy, according to a new analysis from Prologis.

The struggles for obvious reasons have been clear, with health concerns about potential new Covid-19 strains and the costs of retrofitting older buildings, both in space designs and HVAC upgrades.

There is an overall limit of how much office space could be directly converted. Most office space has some serious limitations. Modern logistics require high clearance heights, many truck bays, power upgrades, nearby facilities to provide parking for trucks, and additional power requirements.

“Offices have limited reuse potential as logistics facilities and must be demolished, adding to an already complex process, lengthening development timelines and boosting the rents needed to financially justify conversion,” Prologis notes.

Looking at the top 25 markets it tracks and the Class-A office to logistics spread—meaning expect Class-B and lower offices to be the most likely candidates to demolish and rebuild—Prologis estimates that between 40 and 80 million square feet of office will undergo conversion.

Some of the extending complications are the need for large enough underlying land plots, costs of removing tenants from offices, and the need to ultimately gain premium rent because of the total conversion expense.

“Despite potential opportunities, the office-to-logistics conversion trend is likely to be minimal,” the report says. “Successful redevelopments will be concentrated in areas with high land costs and limited competition from nearby logistics properties. New supply from this source will take time to come online because resolving existing agreements, demolition, rezoning, entitlement, permitting and approvals take much longer than a typical greenfield logistics development.”

Source: “What’s the Opportunity for Office to Industrial Conversions?“

Half of the US markets tracked by Colliers reported industrial occupancy gains of more than 5M SF in 2021.

With industrial warehouse space in major markets nearly filled to capacity, emerging markets are experiencing a bonanza of industrial sector growth, according to a report released by Colliers.

Half of the US markets tracked by Colliers reported occupancy gains of more than 5 million SF in 2021, while 60 markets posted occupancy gains of more than 1 million SF.

The top industrial markets in 2021, measured in net absorption—Chicago, Dallas-Fort Worth, Atlanta, Inland Empire and Houston, respectively—accounted for nearly 33 percent of all net absorption in the country.

The demand for warehouse space, fueled by 3PLs and e-commerce tenants, also is driving industrial sector growth in emerging markets: Memphis, Columbus OH, Las Vegas and Cincinnati each experienced more than 10 million SF of occupancy gains in 2021, Colliers said.

The markets with the most activity growth in 2021, measured in net absorption as a percentage of inventory, were Charleston, SC at 13.5 percent; Huntsville, AL (11.3 percent); Austin (11.2 percent); Savannah (9.3 percent; and Las Vegas (7.9 percent).

The intense demand for new warehouse space spurred a record increase in new construction in 2021, with 520 million SF of industrial space under development at the end of the year, an increase of more than 50 percent compared to the total at the end of 2020.

The Chicago industrial market delivered the most industrial space in 2021, totaling 31 million SF. Dallas-Fort Worth tops the list of markets with the most space under development, with 59.3 million SF in the pipeline at the end of the year.

Bulk occupier demand (companies occupying more than 100,000 SF) remained at record levels in 2021, Colliers said. At the end of 2021, occupier activity in bulk industrial space totaled nearly 583 million SF, a 16-percent jump from the previous record of 502 million SF set in 2020.

The average industrial space footprint of bulk occupiers also increased to 291,000 SF, five percent higher than the average footprint in 2020.

Colliers said third-party logistics providers and packaging companies accounted for more than 28 percent of all bulk activity last year, up from 22 percent in 2020. Seven of the top 10 bulk occupiers in 2021 were 3PLs, with nearly 40 million SF.

The second-largest share of the bulk occupancy pie went to e-commerce companies, who accounted for about 20 percent of activity in 2021.

Source: “Demand for Warehouses Lifts Emerging Markets“