1 minute read
WHAT HAPPENS NEXT? 1
from Atlanta Has A Zombie Problem
by skcr
Has there been a fundamental shift in the office market to less demand in the future? This is similar to several historical trends in modern office space over the years. The pendulum has swung too far towards work-fromhome, as evidenced by numerous Fortune 500 employers now telling employees they must be back in the office for at least part of each week. We agree that some jobs are equally productive when done remotely; however there is an overriding concern at the corporate level that people need to be back in the office for training and adopting company culture. We believe the trend to bring employees back into the office will continue and that the amount of sublease space on the market will begin to drop by the middle of 2023, and that net space absorption will pick up despite the economic headwinds.
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What happens to older and outdated buildings? Look for a wave of buildings going back to lenders which will serve to reset building values. Investors will require a lower basis to retrofit and re-tenant space effectively. There will also be a wave of conversions similar to what has happened to enclosed malls over the last 10 years. It will make sense to look at retrofitting buildings to medical, apartments, hotels, self-storage, mixed-use, and even complete scrapes for land plays, residential re-development, or higher and better use.
What are the short-term and long-term effects of all this available space? Well-located office buildings in desirable locations and with great amenities will continue to attract tenants first. Employers are offering incentives to get employees back in the office. There will also be tenants looking for inexpensive space with the economic headwinds. Wellcapitalized landlords can make generous concessions in order to backfill buildings and stabilize their cashflows. The Grave Dancers, as Sam Zell is most famously known, will buy foreclosed properties and discounted debt to gain control of buildings. These investors will have a much lower basis in their properties and will be able to upgrade the buildings and put out competitive space that could depress rental rate growth over the next 18 months.
