A report about office obsolescence released this week by Dr. Randall Zisler, Chairman and Co-Founder, Zisler Capital Associates and his recently launched affiliate Outsourced Research was widely covered in highly respected media outlets such as GlobeSt.com and Real Estate Alert. The lede is definitely not buried by opening with, stating that, “…as much as 70% of the total inventory faces an alarming period of repricing due to fast-paced obsolescence, accelerated by COVID but exacerbated by evolving environmental and health standards.” The report also suggests that for 30% of the existing office stock, retrofitting and upgrades may be economically unfeasible.”
That’s a tough read and not without merit and timing of this is not coincidental as we look to gain ground in moving back to the office as the place to work. And thankfully we’re trending back in this direction according to the Kastle Barometer that indicates we’re closing in on 38% office occupancy. Of course, compared to a nearly 95% occupancy of NBA games tends to show where individual priorities may lie.
Though it’s good news to see this upward trend, we’re now dealing with two factors vs. one and these being what is going on with our office stock how this is going to be addressed along with how far the trendlines towards working in the office will go.
The first of these is a capital issue and creativity and drive in the real estate industry will ultimately right this ship although it could be painful. Those who understand what is needed to update, revamp, and develop the next generation of office stock will win out. This is nothing new and observing the new technologies and services enter the market is always a fascinating. In this case time will tell and an evolutionary story that continues to march on.
The second issue is going to be tougher to manage and find our way through as it’s an emotional one. After two+ years in the remote working world and all the issues people have managed to deal with, we keep reading reports of corporations both large and small moving towards the “hybrid” model as much as this can cause a peptic disruption to many. The question is what will this new paradigm ultimately look like?
"New York City with an office stock of 400 million square feet this works out to 80 to 160 square feet of office that is unused at any one time"
If the new way of combining both remote and in-office habits result in a three or four day on location presence, we’re looking at a 20 to 40 percent reduction of days in the office. Applying this to my hometown of New York City with an office stock of 400 million square feet this works out to 80 to 160 square feet of office that is unused at any one time. And this can be extrapolated to many other urban dense environments. Yes, this is a very simplistic viewpoint but also not one without its own merits .
As a strong believer in the office and all of the benefits that it brings to society, it's never too early to have the "talk" about next steps in securing its future. Again, we still don’t know what office occupancy will ultimately end up or what “full” occupancy will look like, but we probably need to start owning up to the fact that it will be different.