📢 Commercial Office Properties: Understanding the Loss of Value 📉

Recent transactions indicate a significant loss of value observed in commercial office properties. This trend, influenced by several factors, has sparked widespread discussion and analysis within the real estate industry. Today, we'll explore some of the key reasons behind this phenomenon.

1️⃣ Remote Work Revolution: The advent of remote work has undoubtedly played a crucial role in altering the dynamics of office spaces. The widespread acceptance and success of remote work during the pandemic have prompted many companies to adopt hybrid or fully remote work models. As a result, the demand for traditional office spaces has decreased, leading to a decline in their value.

2️⃣ Changing Workplace Preferences: The pandemic forced individuals and businesses alike to reassess their workplace preferences. Companies aiming for flexibility and cost optimization, have shifted towards smaller offices, shared workspaces, or even fully remote operations. Similarly, many employees have discovered the benefits of working from home, creating a preference for remote setups. This shift has impacted the demand and attractiveness of conventional office properties.

3️⃣ Technological Advancements: Advancements in technology and communication tools have eliminated the need for physical presence in the office. Video conferencing, collaboration software, and cloud computing have facilitated seamless remote work experiences, eroding the traditional reliance on office spaces.

4️⃣ Economic Uncertainty: The global economic downturn resulting from the pandemic has also affected the commercial real estate market. Many businesses faced financial challenges, downsizing or even closing their doors. This disruption has created a surplus of vacant office spaces, further contributing to the decline in their value.

5️⃣ Repurposing and Adaptive Reuse: In response to the changing landscape, property owners and investors have been exploring alternative uses for office buildings. Repurposing commercial office properties into residential units, hotels, or mixed-use spaces has gained traction to maximize value. While this trend promotes revitalization, it can also result in a surplus of available office properties, adding pressure to the market.

It's important to note that despite the current decline in value, the long-term future of commercial office properties remains uncertain. As businesses adapt and strategies evolve, there may be opportunities for these properties to regain their value. The ability to foster collaboration, networking, and creativity remains an essential aspect of physical workspaces.

Real estate investors and property owners are actively seeking innovative solutions to adapt to the changing needs of businesses and individuals. Whether through renovations, amenity enhancements, or redesigning existing spaces, the goal is to create appealing environments that align with the evolving demands of the workforce.

While the current loss of value in commercial office properties may present challenges, it also offers a chance for innovation and reinvention within the real estate industry. By embracing change and identifying new opportunities, stakeholders can navigate these uncertain times and shape the future of office space.

Getting Above Standard Tenant Improvements

Do you want great space that helps define your business and attract new clients? Is your company culture important to hiring and retaining top talent? If any of these statements resonate with you, then you cannot afford to accept standardized tenant improvements.

Above standard tenant improvements are typically any material used to improve your space that is above the common finishes the building owner utilizes . Usually the building owner has a list or book of all standard paint carpet, lighting and other flooring finishes that they are willing to provide to improve their space with. These may not showcase your businesses image, align with your company culture, or provide current/potential clients an idea of the caliber of your services. Many architectural firms, law firms and technology companies (just to name a few) need their space to make an impression on everyone who walks through their front doors. An architect uses their lobby to speak to their design capabilities, lawyers use this & other meeting areas to set the tone for their prowess and other businesses use their interior common areas to reinforce their brand & company values. 

Achieving a certain look and feel beyond what a landlord is offering typically comes at an additional cost of construction.  For example: building out 5,000 sf with building standard finishes may run $60/sf ($300,000); however, your company may want to add design elements to part or all of your space that will increase that number to $85/sf ($425,000). The $125,000 delta between these two numbers can be covered in the following ways.

1. Tenant pays for the difference: now most tenant rep brokers hate this as it isn’t ideal for companies without a large war chest. It consumes the tenant’s capital upfront and can typically be used better by the tenant to grow their business. In the event the tenant outgrows their space ahead of the natural lease expiration, they’ve sunk capital improving a space they didn’t use for the duration of their lease. 

2. Landlord amortization of the difference: this is the most common solution to a tenant improvement overage. The landlord factors the additional cost of the tenant improvements into the tenant’s rent over time. This keeps the tenant from paying for the improvements upfront but does raise their monthly/annual rent obligation. This can be accomplished as a $/psf rent increase or an annual percentage increase. Think of it as a loan on the difference from the landlord. Does the landlord make a return on this loan...of course. Does the tenant lose if they outgrow the space ahead of the lease expiration? Yes, but not as much as if they pay out of pocket for the improvement difference up front. 

3. Covering the difference through a loss in concessions: this is by far the most complicated and situation specific solution. If you have a savvy tenant representative, who knows your improvement costs will overrun a standard market landlord contribution; they will negotiate a robust rent abatement package, then reduce that once the improvement costs are known so that your rent cost/sf doesn’t increase dramatically. The drawback here is that most businesses use the rent abatement period to offset moving, furniture and other soft costs associated with new space. If those costs are minimal, this may be the best option for a business needing above standard tenant improvements. 

*Value Engineering: while not always strategy for covering the cost difference in negotiations, having a great project manager or construction team working with your business & tenant representative to cut construction costs after you’ve secured a certain $/sf in landlord supplied improvement funds can be to your benefit. Make sure your tenant representative negotiated a clause which allows your business to utilize any unused funds in the form of full or partial rent payments. 

If you need any help finding or negotiating on space, call us. We’re here to help. #findYOURspace

Not All Buildings Are Created Equal

All commercial buildings are not created equal. One of the most overlooked aspects of a building’s value to the tenant is the efficiency of that particular building when compared to another. This efficiency is in relation to the ratio of the space the tenant actually leases within their four walls (the usable square footage) and the amount of space attributed to all common areas of the building including the lobby, hallways, restrooms, common conference rooms, common kitchen areas, interior break areas, work out buildings, showers/lockers, phone and electrical rooms, and any other common use area that, when added to the usable square footage, makes up the rentable square footage. This ratio is called the building “core factor” (also referred to as “load factor”, “loss factor”, or “add-on factor”). Understanding core factors translates directly to the bottom line. Since building costs are typically near the top of the expense list, the savings can be dramatic in comparison to other expenses. Pay attention to the core factor.

Does a Modern Office Space Need a Kitchen/Break Room

Office space occupiers often wonder if creating a kitchen or break room within their workspace is necessary. Commercial Real Estate expert Jamal Brown breaks down the reasons why designing a kitchen or a break room as an additional meeting area within your office space may be the best solution. Finding a tenant representation broker that knows how to maximize your usable square footage and use your space to support the company culture is key. If you have any questions on our office space design recommendations, feel free to call us. The Ocean Company is a team of commercial lease and property acquisition specialists with offices in Los Angeles, Orange County and San Diego California.

How To Convert Warehouse Into Office Space

Many small businesses and startups are being choked by rising commercial real estate pricing. Rents are currently at or above pre-recession prices, making companies choose between their facility, or expanding their business. There are options out there for users of office space who want "cool" or creative work-spaces, and we wanted to share one with you. Converting industrial warehouse space into a usable office work-space is achievable with a few minor changes. The two items which need the most attention are climate control, and light. Adding some sort of cooling air circulation will greatly change the atmosphere of a warehouse work environment. Replacing solid doors with glass, and reducing the number of walls within the entire space will allow more ambient light to flow through the work space.