Dated office buildings, even four-star properties classified as commodity Class A, continue to struggle to maintain occupancy and have had difficulty replacing tenants who move out. As tenants increasingly favor new construction, renovating older office buildings, which used to be a surefire strategy to increase occupancy, is no longer paying off like it once did, according to an analysis by CoStar Group.
Only office buildings less than a decade old have been able to increase occupancy since 2020, the analysis said. New office construction is the only segment that has generated positive absorption, while buildings between three and 10 years old have managed to maintain most of their tenants and occupancy. But buildings older than that have experienced severe losses regardless of innovations, CoStar said.
This presents a dilemma for owners of older buildings who might consider a renovation to provide the fit, finish and amenities to compete for top-tier office tenants. The significant capital investment to do so does not guarantee success and CoStar’s data suggest any rewards from doing so are likely to be temporary. In addition, return on investment may be diminished compared with what landlords once achieved on renovations, said CoStar.
Net absorption in office buildings renovated between 2014 and 2018 was positive for four or five years immediately following renovation, far above the national average. However, following the pandemic-related downturn in 2020, almost all of those properties experienced occupancy losses greater than the national average.
Since the beginning of 2020, buildings older than 10 years have lost nearly 420 million square feet of occupancy, an amount roughly equivalent to all the office inventory in the Dallas-Fort Worth Metroplex, said CoStar. At the same time, the amount of sublet space available at office buildings less than 25 years old has been striking and is even more pronounced in buildings between three and 10 years old, the report said.
“This suggests that office tenants today prefer brand-new office buildings more strongly than they did 15 years ago,” said CoStar. “They have been more willing to let leases expire even in relatively new buildings to have the opportunity to move into the latest and greatest developments. This bodes poorly for renovated buildings.”
Source: “Can Renovations Compete with New Office Construction?”
