Retail Estate: Are Office Buildings Obsolete?
Investor's Business Daily
By Joe Gose
Office buildings just don't work like they used to.
Analysts who study office markets released a barrage of optimistic reports this month, noting declining vacancies in many markets and forecasting steady improvement. But some are suggesting it's time to look at converting office buildings to other uses, given the changing nature of certain downtowns, the commercial real estate slump and still-high unemployment.
Office landlords in 27 U.S. markets boosted occupancy in the fourth quarter of 2010, says property brokerage Jones Lang LaSalle. This is fueling hope that hiring will accelerate to further push up occupancy, and eventually rents. But massive layoffs and other workplace shifts, along with efforts to cut real estate costs, threaten to render many office buildings obsolete sooner than expected.
"You could make a case that office buildings are almost a dinosaur today," said Douglas Haney, president of Grubb & Ellis Landauer Appraisal & Valuation, an arm of real estate services firm Grubb & Ellis Co. (GBE) The trends "don't bode well for long-term office use."
...As someone whose job entails gauging the best use of real estate for the dollar, Haney suggests that some downtown office buildings are financially outmoded and would generate returns if turned into housing.
...Converting has its critics. Doing it with lower-quality and underutilized office buildings could create residential opportunities downtown, concedes Gary Painter, director of research at the University of Southern California's Lusk Center for Real Estate. But he argues that the lackluster office demand has been a function of a down economy.
"What you are going to continue to see is a very dense downtown that's a hub for activity," he said. "And as the economy picks back up, I think we'll see renewed demand for office space."