Although the optimistic among us may perceive the pandemic is winding down, try telling that to the owners of office buildings and their leasing agents. Currently the vacancy rate across the country is still averaging about 15 percent—actually higher than at the close of 2020, indicating that many tenants are not renewing. Meanwhile gross leasing volumes are down, as well, suggesting that the hybrid workforce model encourages renting smaller spaces. This reality is taking its toll on real-estate portfolios: In Midtown Manhattan, according to The Real Deal, which covers real-estate news, office building values are down more than 16 percent, representing over $28 billion in lost value.
These indicators may very well be transitory, and a year from now those figures may have completely turned around. But some of the effects of the pandemic are going to be more permanent, such as the shift to hybrid models and more remote work, which employees like because of the flexibility. Either way, building owners and managers are faced with the question of how best to invest. Many are focused on leasing up, which means investing in short- term strategies for securing new tenants and reducing vacancy rates among assets in their portfolio. Others are eyeballing the trends and planning for the future, including repositioning to appeal to growing markets.
Both of these strategies are valuable. Working with trusted consultants to cut through the trends and buzz- words and identify workable approaches, savvy property owners and managers can reduce vacancies short-term and implement cost-effective plans to build value for the long haul.
The ‘Spec Suites’ Question
As a design firm with a studio devoted to working with owners and property managers to help them lease up, Dyer Brown Architects typically handles a certain number of requests for building out marketing suites and spec suites. In Spring 2020, we noticed that the volume of such requests had roughly doubled over a very short period, and our studio leaders wanted to investigate why. Reaching out with a short survey to a number of longstanding clients and industry colleagues—folks working at the executive level in commercial brokerages and large property management concerns—we hoped to learn more about why they thought investing in finished turnkey office spaces with staged furniture was a better option than “white-boxing” (stripping back and painting a light neutral color), especially considering the uncertainty in the Class- A marketplace.
We learned quickly that a consensus had formed around more or less how the market had changed since COVID’s onset and ensuing shutdowns, what prospective tenant firms are now looking for, and why spec suites made good sense—for certain property types, that is. James Russell, an experienced property manager at Cushman & Wakefield in Boston, responded: “Some vacant areas need it more than others. When we get back third-generation space originally rented in the 1990s, we find less marketability, especially with so much desirable sublease space currently on the market.”
With so many long-term tenancies ending last year, Russell’s insight makes good sense. He added that certain spaces and floors often show well without investing in a spec-suite buildout when they are “on the good side of the building with nice views and natural light.” The most challenging spaces to lease are more likely to benefit from a full spec-suite installation. For more inherently appealing suites, those with good light and enjoyable views, white-boxing makes better financial sense.
Consultants with good client engagement skills and research habits can glean a lot of great information from property owners and facility managers, making it easier to anticipate client needs (including the needs of tenant firms) and track shifts in market trends. The following are a few additional key points from this informal survey:
- Location, as always, is key. Prospective tenants looking at your assets in high-value neighborhoods will probably have deeper pockets and their own vision for a workplace. For suites in these buildings, simple white-boxing will typically be the wiser choice.
- Design strategically. When working with architects and designers to complete spec suites, be sure to lean on contemporary palettes of finishes and materials, which show best and have the broadest appeal.
- Remember, less is more. Spec suites should be built out to be as open as possible because it’s easier and less costly to add a wall or a feature after the fact than to demolish one.
Turning to the tasks of maintaining and growing asset value over the long term, a quick look at some market fundamentals suggests there are opportunities for shrewd investment. Commercial owners who are comfortable with thinking over the horizon should look at their portfolios and begin to consider whether their Class-A office properties could be upgraded or converted to support other uses, especially those that yield a per-square-foot premium. It will take next-level investment and strategy to gear up for tenants with specialized needs, but the outlook in the ever-booming biotech and life-sciences sector—in markets like Boston, New York and Atlanta, as well as in smaller research hubs emerging nationwide—suggests it’s worth the effort.
Growth in these industries shows no signs of slowing down and, in fact, may be accelerating. According to research from Coldwell Banker published in June 2021, employment in life sciences reached a record high in March 2021, and demand for research space across all major markets is up 34 percent from mid-2020. In Boston, most of the recently inked large-scale lease agreements are for biopharmaceutical corporations: CRISPR Therapeutics, for example, signed up for 260,000 square feet downtown while, over the river in Cam- bridge, Mass., Bristol Meyers Squibb has leased 360,000 square feet.
Whatever the new use, renovation costs are a factor. Exploring conversions to other new uses may be intriguing—affordable housing, for example—but the robust and resilient life-sciences sector would seem to offer a more immediate opportunity to build value. It’s important to note the research spaces used by biotech and life-sciences tenants must meet elevated requirements for life safety. Engaging directly with owner groups and management teams in close consultation can help put them on the fast track to capitalizing on life-sciences sector momentum.
The good news is that many existing Class-A properties have infrastructure that is readily upgradeable, making it possible to quickly and cost-effectively pivot certain assets to support non-specialized, flexible research. Typical research floors require electric, water, gas and data ports be available across the active laboratory. Building in flexibility is critical as research modes may change rapidly, so specifying benches and casework that can be easily moved and rearranged is advisable. Likewise, investing in plug-and-play infrastructure connections can help tenant research groups get up to speed quickly upon move-in or when they switch modes. The most important feature is ventilation: For the health and safety of occupants, most jurisdictions require minimum standards for air exchange and for the availability of hooded vents lab benches.
These upgrades may sound challenging, but for owners who are already considering repositioning one or more assets, the added costs for research-focused upgrades are more than reasonable, especially when one figures in the potential for significantly higher per-square-foot rates, not to mention fewer vacancies.
Traditional office leasing returning to a pre-pandemic scale at some point in the future is certainly possible, and only a fool would try to predict the future. But the life-sciences sector has demonstrated enormous resilience and growth even during disruptive periods. Owners with large, well-located commercial facilities, whether in major bioscience markets or in areas emerging as growing research hubs, would do well to start working with trusted consultants on cost-benefit analyses for converting Class-A office properties into flexible research space.
PHOTOS: Dyer Brown Architects