Repurposing Commercial Real Estate
High office vacancy rates around the world have everyone talking about what to do with older and more obsolete office buildings.
Recently Carter Jonas (agency) reported that “close to 20% of UK offices are likely to be unlettable to the majority of occupiers with investment because of upcoming legislation on energy efficiency”. For that 20% of buildings, accelerated obsolescence is environmental; legislation is pushing buildings to keep up.
In the US funding for commercial real estate is getting tougher. For office buildings needing funds, accelerated obsolescence is financial, due to lack of funding.
In Australia, it will be a mixture of environmental and financial reasons. All commercial tenants are more conscious of the environment than ever before but not everyone can afford the extra. For the vast majority of office tenants, the difference between the number of Stars (or not) is nowhere near as important as the cost and location of the office.
We think it will be a while until office buildings are repurposed. The recession of the early 1990’s produced some well-located office building conversions along Kent Street but that was only possible when the values fell to a level that made sense. Today’s values are not facilitating any repurposing; yet.
Only when the values really change will the market dynamics allow faster and more economic repurposing. The opportunities are boundless exemplified by Google recently converting an airport hangar in Los Angeles into an office complex and converting a 1960s research facility in Sunnyvale into an office building. But those are different values and different market dynamics.
Hence the current answer to the high vacancy in our capital cities is not repurposing because the values do not make sense. Until they do, the answer continues to be, lease the vacant space or the tenant will go elsewhere.