Rising interest rates, construction materials costs, tenant improvement expenses and higher vacancy rates among commodity office buildings in the suburbs have encouraged economists and real estate professionals to dub 2023 as “the year of increases.”
When combined with the enduring work-from-home dynamic and talk of a possible recession arriving later this year, Owen Rouse, Vice President of MacKenzie Commercial Real Estate Services, LLC, says the existing real estate climate may present the perfect scenario for owners and investors of commercial office assets to consider disposition or reposition strategies.
“Owners and investors of commercial office buildings, especially smaller and older assets situated in suburban markets, are advised to closely monitor current economic and real estate trends that could conspire to negatively impact values,” explained Rouse. “Although many workers have returned to the traditional workplace environment, a significant percentage are expected to maintain a remote presence which has caused companies to rethink and, in many instances, downsize their footprint. Assets especially at risk for decreased valuation include those with smaller floor plates, aging HVAC systems and those with principals getting close to retirement age.”
He adds that “holding an asset too long in an illiquid or declining market can force owners to become extended checkwriters due to rising expenses and vacancies.” Rouse says that “investors cycle into and out of positions for specific reasons and assets can become increasingly difficult or easy to manage as they age.” Rouse further suggests that it is essential for owners and investors to be “keenly aware of what is transpiring in their specific submarket by consuming timely market intelligence that can provide guidance in their decision-making.”
“There are multiple ways to successfully navigate through the decision-making process, but the key to remember is that each situation is completely unique and that a thorough analysis of the asset and specific market is the necessary first step,” Rouse explains. “The promising news is that opportunities do exist but owners need to be proactive rather than reactive.”
Rouse says that possible solutions include establishing a new marketing and leasing strategy that can elevate occupancy within the building, selling the asset or initiating an aggressive repositioning or redevelopment plan that can untap long-term potential. By way of example, he points to the efforts of a commercial real estate development company that, after acquiring a small commercial office portfolio, revealed plans to convert a portion of the space to a flex/R&D configuration to take advantage of existing market conditions. Entirely repurposing the land is another option.
Other factors to consider in the evaluation and decision-making process include the availability and cost of capital needed to perform project upgrades, market-specific zoning regulations and political temperament.
“It is extremely beneficial to generate a third-party perspective of the situation that is not influenced by internal biases that could cloud judgment,” Rouse said. “Markets form and reform as cataclysmic events take the stage and a seasoned real estate professional can spot trends and identify which companies are entering or exiting a particular submarket.”