Surplus office space should be seen as an asset, not a liability.
Where some people see problems, others see opportunities. So, let’s talk about the untold tens of thousands of square feet of unoccupied office space companies have been sitting on since the pandemic changed where and how much of the world works.
A recent update from the commercial real estate firm, Avison Young, sets the stage:
“The U.S. economy became more distressed in November and December, marked by more than 60,000 tech layoffs and a sudden 58.8% drop in office job postings from November to December—predictive indicators of office demand. Tepid leasing activity in Q4, [down] 46.2% vs. the historical quarterly average, embodied how occupiers are navigating mounting economic distress and evolving workplace strategies as return-to-work levels are just 42.1% relative to the same period before the pandemic.”
(Amid this maelstrom, I continue cheering for the hybrid-work brigades and urging employers to get with the program.)
Like so many other things leaders worry about, the “office real estate apocalypse,” as a NBER (National Bureau of Economic Research) working paper called it last Fall, is not a uniquely post-pandemic phenomenon. Nor is it an apocalypse. Others have wrestled with similar challenges in the past. We should learn from them.
An interesting place to start might be central Pennsylvania in the borough of Middletown, on the eastern shore of the Susquehanna River.
Middletown is situated about 10 miles southeast of Harrisburg and is the home of Harrisburg International Airport.
From 1898 until the late 1960s, however, the current airport location was a military installation, first an army outpost and then, after WWII, Olmstead Air Force Base, which housed both the air base and other Defense Department operations. In 1969, Olmstead was decommissioned—closed—and its 11,400 civilian employees were either transferred elsewhere or had to find new jobs. It was a big blow to the Harrisburg area. But the blow was cushioned somewhat by transforming the base into the capital city’s airport—a seemingly obvious solution.
In the decades that followed, hundreds of Defense Department facilities were similarly decommissioned—ranging from rundown, nondescript reserve centers, to huge military complexes that were major economic contributors to nearby communities. One such base was Fort Devens, a sprawling 8,000-acre Army base west of Boston, which closed in 1996. Today the former base, according to a Worcester Telegram & Gazette article from several years ago, is “a hub of biotechnology and manufacturing.” It’s also home to a small unincorporated town, a golf course, “a huge movie studio sound stage,” a museum, hotels and more.
The current crop of worrywarts could learn a lot from the base closings experience. Sure, they created challenges for local community leaders, but as Commercial Investment Real Estate magazine explained, they also created opportunities.
So, what about all the current underutilized office real estate? With office occupancy rates barely in the 60% range in some cities, many workers adamant about not returning to the office full time, and some even unwilling to return to the big cities where they previously worked, property owners and lessees both have reason to be concerned.
But there is a solution: convert some of the space into needed housing.
Sure, there will be a lot of hoops to jump through to get the necessary zoning changes, building permits and financing. But there are also incentives available—especially for those willing to take on the challenge of retrofitting older buildings that tend to empty out first.
As Peter Merwin, a top urban design specialist at Gensler, the global architectural firm, noted in a National Association of Realtors report on repurposed buildings, “Unused office space can be well-suited to creating apartments, with plenty of room in the core of buildings for storage.” Residential housing, he stressed, requires significantly more plumbing, so it’s not a cake walk. But there are ways to manage costs and, for those with an eye on affordable housing, tax credits may be available, with additional tax benefits if the building has historic value. This can reduce costs by as much as 45%.
Creating much-needed affordable housing isn’t the only option. For the philanthropic- minded executive, which most should be, perhaps some unneeded space could be converted into homeless housing—something Amazon already has done in partnership with a local nonprofit, Mary’s Place, with one of its Seattle office properties.
The eight-floor, 63,000-square-foot shelter, called Mary’s Place Family Center in The Regrade, has its own private entrance and is separated from the other parts of the building still used by Amazon employees. As the entertainment industry publication, Deadline Hollywood, explained, “The space has a large dining room, an industrial kitchen with commercial cooking equipment, office space for Amazon’s legal team to provide support to shelter residents, and recreation spaces for children and teens.”
These are hardly the only practical uses of surplus office space. There are certainly many other possibilities.
The point is: Surplus office space should be seen as an asset, not a liability. This is not a new challenge. Many others have been there before. Study what they did right, or wrong in some instances, and act accordingly.
