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Commercial: Expect More Mixed-Space Development

Even commercial sectors hit hardest by COVID-19 are showing signs of life. Given tight residential markets, though, office-to-housing conversions are a hot topic.

SAN DIEGO – Economic and real estate experts in San Diego for the National Association of Realtors®’ (NAR) convention, discussed the latest data and insights pertaining of the commercial market’s future.

NAR Chief Economist Lawrence Yun opened the, “Commercial Economic Issues & Trends Forum,” which was moderated by Moses Hall, 2021 Commercial Economic Issues and Forum chair.

According to Yun, the economy improved over the past year, following the worst of the pandemic – and retail is facing a surprising recovery given the rising demand for online shopping. The office sector is starting to recuperate. It’s happening at a modest pace due to job growth and because some workers are heading back to the office.

“The demand for apartments in general is rising, especially in the Sun Belt states,” Yun said. “Whenever you have job growth, the demand for apartments also increases.” Strong apartment rental demand has stimulated rent growth, especially with new leases, with rents rising over 10%.

“When housing prices increase quickly, that leads to a boost in the rental demand,” Yun added. But “many renters, unfortunately, have been priced out of buying a house.”

While the rental market has done well, the office sector has seen little development over the last two years, attributed largely to more work-from-home opportunities. Although Yun says offsite working has declined significantly, overall remote work is still elevated, especially when compared to pre-pandemic levels. Because many employers still allow teleworking options, offices all over the country have seen very little activity since the start of the COVID-19 pandemic.

Turner Levison, co-founder and CEO of CommisionTrac and senior account executive at Yardi Systems, a property management platform, agreed that a number of office spaces are underutilized. Levison said that vacant space presents an opportunity for businesses and large companies to use the areas for other needs.

“Seventy-eight percent of people believe the office is still vital,” Levison said. “Now, that’s not to say people still plan to go into the office five days a week like we used to.”

Levison suggested office building owners consider some type of hybrid workspaces for unused areas. Such a setup, he said, would accommodate evolving tenant needs and future office desires.

Levison encouraged tenants to embrace telework, because it could lead to a chance to craft office space that “fosters increased in-person and remote productivity while serving as the hub for enhanced culture.”

A recent NAR study – Analysis and Case Studies on Office-to-Housing Conversions – explores the feasibility of converting office buildings into housing, especially multifamily housing, taking into account a given market area’s potential for office-to-housing conversion, market fundamentals, a building’s physical condition and layout, and zoning regulations.

The study found that 22 out of 27 metros or submarkets heavily impacted by the pandemic have market conditions that make office-to-housing conversions possible. Among the largest commercial markets, the highest potential for office-to-housing conversions are in New York, Chicago, Los Angeles and Boston; the least potential appears to be in Washington, D.C. and San Francisco.

“Class B office buildings” have the most likelihood for conversion to an apartment building, according to the report.

Yan Khamish, managing director of CrowdStreet, an online commercial real estate investment marketplace, took the stage last and discussed another report titled, “Office, Mixed Use and Redevelopment Case Study,” which touts the positive results for these kinds of real estate combinations. Mixed development use, according to Khamish, yields lucrative results.

Khamish said that mixed-use development has had consistent large gains since 2014 with no indications of a slowdown.

“Multifamily, mixed use and industrial are leading the way,” he said.

Khamish said corporate real estate is a hedge against inflation, and he added that sponsors and investors are seeking growth states with low or no state tax demand.

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