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Redeveloping Old Office Spaces: How to Tap into a Significant CRE Opportunity

by Abdus Subhan
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High vacancy rates in office spaces across the US have provided an opportunity for CRE investors to repurpose them into other uses that will provide high returns. Investors that can gain quick access to soft deposit financing can move quickly on these properties and gain an advantage in a competitive space. 

Office spaces as a CRE asset class had a bumpy 2023 with national vacancy rates climbing up to 19.3% in Q3, 2023, according to Moody Analytics, and closing at 18.3%, according to Commercial Edge

The outlook for 2024 is no better, with US News, J.P. Morgan, and CBRE not expecting any significant reduction in vacancy rates. Instead, they all expect that there will be more efforts to convert office spaces into other uses.

What can you convert office spaces into?

Many CRE investors have converted old office spaces into co-working environments, which seems to be a natural use for office spaces. 

Remote workers who might not be entirely comfortable working at home (at least not all the time) or might lack the perfect internet connection to do so may prefer to work in such environments.

Other uses have included retail stores, recreational spaces, restaurants, theaters, event venues, boutique hotels, among others, according to SVN Commercial Advisory Group

J.P. Morgan also expects that many office spaces will be converted into data centers. As digitization efforts continue and artificial intelligence continues to attract the attention of big companies and governments, the demand for data centers is rising and will continue to do so. 

The Federal Government has also been working on incentives to encourage office-to-residential conversions in a bid to solve the supply constraints in the residential space.

Why conversion is not always easy

Nevertheless, it is worth noting that conversion is not always easy. 

Take data centers for example. Rising Realty Partners notes that because data centers have energy requirements  that differ from office spaces, conversions may be physically difficult. For example, data centers require raised floors and high ceiling height which office spaces often lack. 

Moody’s also made this same point in regards to office-residential conversion. Their survey of office spaces in New York Metro showed that only 3% of office spaces are viable for apartment conversions. 

Should you give up on conversions?

Does this mean that office space conversions can’t be done. No! Both Rising Realty Partners and Moody’s acknowledge that it can be done. 

In fact, the average number of conversions nearing completion as at September, 2023 (100) was more than 2X the average number of conversions between 2016 and 2022 (41), according to CBRE

The point is that CRE investors must be aware of the difficulties and plan accordingly. 

This means then that as an investor, you must do a thorough analysis to determine if the conversion is physically, financially, and legally possible. Only when you have ticked those three boxes should you embark on conversion. 

Prior to this, you must also be sure that there is demand for the asset class you are converting office spaces into. This means you must do thorough market analysis to identify the need of the community and also their ability and willingness to pay for what you believe they need. 

For example, a data center in a community with high risk of natural disasters is a no-no and a co-working space where people prefer to work inside their homes or in coffee shops won’t generate enough demand. 

How to gain advantage over competitors 

The rate of office conversions since 2023 shows that investors see an opportunity here. We have also mentioned how the Federal Government has been supporting office-residential conversions. 

In essence, many CRE investors are tapping into this space. 

Since earnest money deposits have become popular, investors who can quickly provide them have been gaining a competitive advantage. This is because sellers will only negotiate with potential buyers who have their earnest money deposit in hand. 

With a company like Duckfund, you can complete an application for earnest money financing in 2 minutes and get the cash you need within just 48 hours, all without submitting any credit report. 

Since Duckfund provides earnest money deposit for multiple deals at once, you can quickly snatch up many office spaces and redevelop them for good returns. Having a guaranteed source of earnest money like this ensures that opportunities to make profit are endless. 

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