Commercial real estate has been profoundly impacted by the COVID-19 pandemic. Some estimates for office space in particular are projecting global vacancies to continue to rise through 2022, and officials in some struggling city markets are no longer predicting a long awaited “bounce back.”
As developers and building owners reexamine their portfolios, many are wondering if they will be welcoming back tenants in the same numbers. And even then, will they come back to the same buildings?
Many commercial spaces emptied out as a precaution to protect workers’ safety at the start of the pandemic. But tenant priorities have started to change. Now that we’re more than six months away from those early days, many are insisting that their “post-COVID” office has to offer an experience that could not be had at home.
Without doubt, these shifting priorities will put older, already-struggling Class C buildings at a deficit compared to modern Class A developments, which are amenity rich and flexibly designed with higher ceilings and better ventilation. With tenants likely to take less space in better buildings to keep costs down, many of our clients have been asking us how to prepare. How can they get ready for this possible shift in the market?
For decades, many landlords have tried to fight the overall “gentrification” of the market in major cities by continuously upgrading their buildings or adding amenities. But as one developer told me recently, adding amenities such as in-house gyms or renovating lobbies and washrooms has become a Class C “arms race” with little to no increase on return. In markets like Calgary, they are spending millions just maintain current lease rates.
The challenges and opportunities of commercial to residential conversion
We all know the challenges of underperforming Class C commercial office buildings: dark floor plates, low ceilings with 11 foot floor-to-floor, shallow, inflexible lease spans that are designed to be divided into small cellular offices or cubicles. Most also have small centralized mechanical systems, and there are no operable windows.
But what if we reimagine these spaces as residential units? Those 11-foot floor-to-floor heights are actually very desirable “loft style ceilings” in the residential market. As are shallow lease depths, which residential real estate developers pitch as “wide shallow units, with great natural light.” Even the dated centralized mechanical systems become “efficient centralized systems with heat recovery and sustainability built in.”