At least 30% of all vacant office buildings in the United States are now "basically worth nothing" and should be "torn down," according to a CRE vet.
In recent years, some commercial property owners have turned their vacant office spaces into apartments in an attempt to avoid defaulting on their loan. Office to residential conversions rose by 357% since 2021, with more than 55,300 office-to-apartment units ready to be converted across the country.
However, these efforts may not be enough, according to Fred Cordova of Santa Monica-based Corion Enterprises.
"There will be a bifurcation...The product in a good location with a good, safe environment will recover. And then you've got another group that will somehow hang in there and get reset in pricing. And then you have the others that are basically worth nothing, the D class. Those just have to be torn down. That's probably at least 30% of all offices in the country," Cordova said, as quoted by Fortune.
While converting office spaces can serve as a partial escape route for real estate owners, the cost that comes with the conversions and the codes that need to be met would squeeze the margins of would-be developers.
"[We used to be involved with] conversions that cost $75 to $150 a foot. Now, the market rate is $350. For high-end luxury, it's $450. The economic model is very challenging for conversion. The way to do it is for governments to provide subsidies for conversion. The government needs to provide about a 20% cost subsidy," Cordova added.
What Is Happening in the Office Industry?
Office vacancy rates soared to 19.6% in the fourth quarter of 2023, per CNN Business, citing data from Moody's Analytics. That is the largest quarterly increase reported since the first quarter of 2021. It is also the largest rate of office vacancy reported within the past 40 years.
Values of office spaces plummeted following the COVID-19 pandemic after more businesses switched to a remote working or hybrid working model. The value of office properties across the country plummeted to $1.8 trillion from its pre-pandemic value of $3 trillion, said Starwood Capital CEO Barry Sternlicht.
