Rethinking surplus office, commercial space in a changing culture

(Image credit Max Vakhtbovych, Pexels)

Developers and owners of commercial real estate may be able to make properties more attractive and efficient by incorporating community ventures into surplus space and/or embracing ESG compliance standards.

That holds true whether developers are building new or if a property is being revamped to meet a tenant’s evolving needs, according to Nancy Cox, partner and real estate leader at The Bonadio Group.

As employees continue to embrace the hybrid work model and as environmental accountability becomes more prominent, those in commercial real estate must adapt.


“There is a decline in the need for office space, you can see it everywhere,” Cox said. “A lot of employers are keeping office space, but they don’t need as much.

“The industry in general is finding that old Class C office space is just not attracting anyone anymore,” Cox said. And unless it is Class A office space, “there should be some incorporation of better amenities to attract new tenants.”

Indeed, fourth quarter office vacancy soared to 22.8 percent in the Rochester metro area, up 8.3 percent year-over-year, according to Cushman & Wakefield’s Marketbeat report.

For all of 2022, nearly 950,000 square feet of office space across all classes became available, numbers not seen since 2008 and The Great Recession, Marketbeat said.

That’s why attention to ESG affairs (environmental, social and governance) might be beneficial. In major cities across the country, property owners are making large, unused rooms available to the community at large.

“If they have a huge eating or communal space, they’re converting it into a soup kitchen and becoming more community involved,” Cox said. “They’ll work with an organization that’s already established in the community. We haven’t seen it in this market yet, but things trickle down.”

Not only do such decisions benefit the community, but they indicate someone cares about the big picture and is looking beyond just the bottom line.

“Tenants care about that, investors care about that,” Cox said. “By incorporating these community-based things into spaces, tenants are more attracted, and so are investors.”

The same is also true with the creation of LEED-certified buildings or making upgrades within existing properties so they are more environmentally friendly and people friendly.

“Creating a healthy work environment is important to tenants and investors,” Cox said. “Developers are putting in a lot of advanced ventilation, filtration, purification into their space, and incorporating more of that outdoor space.”

Because commercial real estate contributes significantly to carbon emissions, the movers and shakers in the industry “really need to think about the way they’re building and the energy they’re using to heat and cool and light buildings,” Cox said.

“It’s more expensive in the short term but tenants care and investors care about these environmental things and social things, so it’s just going to become more and more important.”

Cover of the 2022 State of the Real Estate Industry Study produced by The Bonadio Group. (Image provided)

Each year The Bonadio Group surveys construction or real estate leaders on a variety of topics. The findings help shape the firm’s annual conference, which this year is set for Feb. 7 at del Lago Resort and Casino.

The 2023 New York State Construction & Real Estate Industry Conference will feature tax updates and incentives available for the industry, cybersecurity advice and a keynote address from Michael Elmendorf II, president and CEO of Associated General Contractors of New York.

The survey showed that 87 percent of respondents had taken advantage of tax credits, but Cox said not all are aware of what might be available, such as credits for mortgage recording tax.

“With so much economic uncertainty and rising interest rates, it’s important to think creatively when it comes to using credits and incentives, but also ways of thinking about current space and potential ways to re-purpose it,” she said.

“If you’re implementing those environmental protections into your development, there’s a lot credits available because the government wants to encourage developers to do it.”

Methods of depreciation also can provide significant savings, and it could start with a cost-segregation study, Cox said. The survey showed 64 percent of respondents had opted to do so, speeding up the normal 39- or 27 ½-year depreciation process.

“Engineers and CPAs go through a building and find different things they can take out from the structure of that 39-year property and they make it depreciate faster,” Cox said. “So it’s a way accelerate depreciation into five-, seven- and 15-year property and it creates huge deductions for the first few years.

“Any building owner should look at a cost segregation study because it helps create cash flow, and that’s exactly what developers need to continue to build.”

When it comes to development, banks continue to be the go-to source for major funding, according to 69 percent of respondents, but 38 percent also rely on private investment.

Cox said it’s even more important now to include accountants in the development process.

“With rising interest rates, you’re really going to have to think about how you structure a deal,” she said. “It is extremely important to have your tax accountants and accountants involved in those discussions with your attorneys from the beginning, because those tax credits and incentives are more important than ever. Because if they’re not part of the structure of a deal, you may not be able to have that deal cash flow. It may not make sense to do that deal at all.”

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