Building owners from coast to coast are repurposing their spaces to lure tenants back to the office.
When Vishaal Bhuyan, cofounder and CEO of Aanika Biosciences, started the company in 2018, there was one employee located in 400 square feet of space in Industry City, a hybrid workspace located in Brooklyn, New York. Although the pandemic ushered in a new era of remote work and millions of people are still working from home, Aanika Biosciences is bucking the trend. The company now rents 27,087 square feet on the entire third floor, paying $35 per square foot.
“What kept us at Industry City was the campus and the growing vibrancy and diversity of the businesses here,” said Bhuyan. “Industry City has great dining and programming offerings, but the accretive value of being around diverse people in tech, art, fashion, and more is the true magic of the campus.”
Although less than half of the available office spaces are occupied in New York City, Industry City—comprised of 16 buildings that are on 35 acres of repurposed industrial space—currently hosts more than 550 companies. Over the last decade up until now, Industry City has undergone $450 million in renovations. Among the 550+ tenants on campus, there are more than 60 media companies, including BSE Global (The Brooklyn Nets), NYU Tisch Center of Virtual Production, and Conde Nast, and a notable list of nonprofits, artists, and designers. At a time when other commercial building owners in the region are scrambling to find tenants, the property is more popular than ever and 85% occupied.
“There is no question that the market is tight right now,” says Jeff Fein, the senior vice president of leasing. “But we’ve done 150,000 square feet of new leasing this year.”
The commercial leasing industry overall is facing record-high vacancies and the threat of loan defaults. To save their buildings and businesses, commercial space owners are getting creative, making adjustments based on modern workspace trends and catering to their tenants’ needs.
Industry City, which has flexible and reconfigurable floor plates, responded to the changes in the workplace by making strategic conversions.
“We’ve split a 28,000 square foot space into four 7,000 square foot spaces and have had a lot of success leasing those spaces,” he says. “Those tenants often decide to expand and, if we have the availability, they can do so in-place by taking another quarter of that split.”
Providing tenants with smaller spaces and the ability to expand and giving them top-of-the-line amenities like a state-of-the-art fitness center, tenant-focused programming and events, a luxurious executive conference center, and some of the best food in Brooklyn has helped Industry City, according to Fein.
“Employees have been coming back to the office faster because of these features,” Fein said. “We have seen that employees return to the office for an improved experience and professional community.”
It’s a lesson that other commercial property owners can learn from in this current environment, where U.S. office vacancy rates recently hit an all-time high. According to a report in Axios, currently, 12.9% of office space is vacant, which marks the sixth straight quarter that the vacancy rate has increased. And that’s not all: The office space availability rate, which looks at vacant offices and currently leased space that has been listed or subleasing or isn’t being renewed is at 16.4%, another all-time high.
Over at Cushman & Wakefield, the global leader in commercial real estate services, office vacancy across the company’s properties has gone up since the beginning of 2020. Across the 90 U.S. markets that Cushman & Wakefield Research tracks, the overall vacancy rate was 12.7% in Q1 2020, and it ended Q1 2023 at 18.6%, according to Head of Americas Insights, Global Research at Cushman & Wakefield David C. Smith.
From repurposing their spaces to dividing up their current offerings, they’re getting creative in order to survive—and hopefully thrive—in the changing work environment. Here’s how they’re responding to the empty commercial space trend.
OFFERING SPEC SUITES
KBS Realty Advisors, one of the largest owners of commercial real estate in the U.S., is providing spec suites to tenants in order to fill vacancies. Marc DeLuca, the CEO an Eastern Regional president at KBS, said that leasing at their properties has been steady, though they have had to change their approach. Cue the spec suite, a turnkey space for companies that are eager to get their businesses up and running quickly.
“We’ve found that spec suites lease up rapidly when they feature high-end finishes and quality furnishings similar to a model home, ensuring they provide a superior tenant experience,” says DeLuca. “This space provides excellent finishes and leading-edge technology that today’s firms need to stay ahead of their competition.”
Additionally, KBS, which invests in properties that are close to shopping, dining, entertainment options, and public transportation hubs, has put more emphasis on protecting their tenants.
“We’ve noticed throughout our portfolio how important safety has become for tenants [who] are choosing an asset, so we are looking into new ways to make them feel safe,” says DeLuca. “For example, we’re looking into adding robot security guards at some of our properties.”
TRANSFORMING INTO HYBRID WORKING SPACES
While some companies went entirely remote during the past few years, others chose a hybrid model, allowing employees to work at home some of the time and requiring them to come into the office for meetings and other important events. IWG, the leading global operator of hybrid working solutions—which has around 3,500 buildings globally, including around 1,100 in the U.S. alone—has seen an increase in hybrid work arrangements at their properties.
“As the ongoing shift towards hybrid working accelerates, conventional office occupancy will continue to fall as businesses require less traditional space and turn to flexible and hybrid workspaces instead,” predicts Mark Dixon, CEO and founder of IWG. “Last year, IWG welcomed hundreds of new partner locations and is on track to add 500 new locations in the U.S.,” he notes. “Overall, IWG’s space demand is up around 30% since before the pandemic, due to the growing demand for hybrid work solutions.”
According to Dixon, many property owners are asking IWG to repurpose their traditional office space to monetize what is currently empty space. They’re seeing that businesses prefer the hybrid model, so they can save on office space, especially in light of the current unstable economic conditions in the U.S.
“There is no going back to pre-pandemic times,” maintains Dixon. “I can say with certainty that the geography of work has changed permanently and the office is far from dead, it has merely moved to a much more convenient location, close to where people actually live.”
DESIGNING BASED ON OFFICE TRENDS
Remember the open office trend? Employees would sit elbow-to-elbow at large conference tables with their colleagues, and there were no cubicles or dividers in between them.
Post-pandemic, that trend is fading, and commercial space owners are staying ahead of the curve: They’re now designing their properties so that workers can spread out.
“Companies want larger space per square foot for their workers,” says Regina Stilp, founding principal at Farpoint Development, which renovated what is now the Google building in Chicago. “We see personal space going from 100 square feet per person to 125 or even 150 square feet,” she explains. “This works because people are using office spaces in shifts, so spaces are nicer but shared.”
SEEKING DIFFERENT TENANTS
In Northern California, tech companies dominate the real estate scene. And during the pandemic, those companies went fully remote—and stayed that way. David Parker, the founder and CEO of a residential and commercial real estate company, focused on smaller businesses instead. Now his 100-plus units have remained occupied. Parker is leasing to independent contractors and remote workers instead of companies.
Since the pandemic, he’s noticed that there is a burgeoning cohort of people looking for an alternative to working from home. “It’s not so much that I’m repurposing as I am rethinking my marketing strategy,” Parker says. “For example, I’m currently in the process of negotiating to buy the building next door [to one of my properties],” he says, “The demographic that I’m targeting is people who are now working from home for one company who might want to go to an office a few days a week just for a change of pace.”
REPURPOSING THEIR SPACES
Some commercial building owners are trying an entirely new strategy altogether: They’re repurposing their empty offices and making them into residential, hotel, and mixed-use spaces instead.
“Repositioning strategies are among the least costly and most efficient strategies for bringing an obsolete office property up the value and relevance curve,” says Smith of Cushman & Wakefield. “Repurposing will make sense in a small portion of the office inventory, but can provide relief on the margins for the office market and for other sectors that are currently constrained, for example, housing in many cities.”
THE FUTURE OF COMMERCIAL SPACES
By responding to these trends, commercial space owners are much more likely to be in business tomorrow. While nobody knows what the future of work will actually look like, some are optimistic that in-person work will make a comeback, and commercial spaces will be in style once again.
Stilp, who said that leasing at her company is slower post-pandemic, believes that people will recognize the importance of in-person collaboration and head into to the office again.
“Everyone loves to say the office is dead, but there is nothing else for learning a field or craft like collaboration or building relationships like face time, and you can only get those interactions in an office setting,” she says. “My heart breaks for remote workers—especially the young ones who have never been mentored or do not have the opportunity to really learn from close collaboration on a daily basis,” Stilp explains, “I learned everything I know by eavesdropping on my ‘elders’ and asking questions and more.”
Says Stilp, “I think the pendulum will swing back—not to a full 180 degrees —but definitely close to it.”
EDITOR’S NOTE: An earlier version of the article stated that Industry City had less than half of its available office spaces occupied. It is actually 85% occupied. We regret the error.
Read the article from Fast Company here.
Learn more about leasing office space at IC here.