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“Zombie offices” are a conspicuous sign of market upheaval

Waves of layoffs, stricter ecological requirements, and the adoption of hybrid employment models are altering the commercial real estate market. Using a professional office space management system becomes a crucial competitive advantage in times like these.

In many countries, 2022 was a complex year for the commercial real estate industry. A prominent sign of the industry’s difficulties is the appearance of “zombie buildings” in the urban landscape: the term refers to lower-value buildings which are currently offered on the market but have no financial prospects.

The demand for these buildings has fallen, and many tenants have already abandoned them, which makes it difficult to modernize or repurpose them. In some cities, such as New York and San Francisco, entire office blocks face uncertainty. However, the “zombie offices” phenomenon is only one consequence of much deeper changes.

Times of market turmoil

In the US, rising interest rates, high inflation, and the fear of a recession weigh on the CRE market. Concerned investors are trying to withdraw their money from commercial real estate funds, as a recession will threaten the sector’s performance. Similarly, analysts have warned that commercial property values in the United Kingdom could drop by up to 20% in the coming years.

The technology sector is also heavily affected by this economic uncertainty, and this year companies have laid off tens of thousands of employees in response. These job cuts are another reason why technology companies need less space. Any downsizing directly impacts real estate companies, as the tech giants are prominent clients of the CRE sector.

Yet these are not the only factors that are changing the commercial real estate market. Environmental concerns and the rising popularity of hybrid work are steadily shaping the technology industry and the CRE market as well.

Countless companies have already adopted flexible, hybrid work models, and their employees no longer work exclusively from the personal office. As the role of the personal offices is gradually changing, a smaller office area becomes sufficient. Consequently, the whole workplace is transformed, and the demand for commercial real estate is decreasing.

These circumstances also explain the “zombie buildings” phenomenon: Usually, “zombie buildings” are relatively old buildings that are not in high demand and do not meet current ecological standards. Environmental, social, and governance (ESG) criteria require renovating old buildings to upgrade their energy efficiency.

However, this is an expensive renovation, and investing in an outdated building that does not generate sufficient revenue is not worthwhile. Other solutions, such as converting empty offices into apartments, are often unfeasible. The result is a progressing devaluation process: over time, finding tenants for these buildings becomes increasingly difficult.

As revenues decrease, maintaining obsolete buildings will be harder, and their value will continue to decline. Ultimately, without a comprehensive upgrade, renting such properties will become illegal, and they will disappear from the market.

Various attempts to avoid the crisis

Companies are mitigating risk in various ways. Often, companies interested in reducing their real estate expenses sublease office space to other tenants. This year, companies such as Airbnb, Lyft, and Salesforce have already made such moves. Subletting allows them to recover part of the expenses and avoid early termination fees.

As office work has become less dependent on the personal office, the traditional, rigid office layout is becoming obsolete. Unsurprisingly, office occupancy measurements reveal that parts of the workspace are significantly underutilized. Having identified inefficiently used areas, companies can redesign and optimize them, for example, by adding dedicated collaboration spaces. Naturally, such space optimization demands special consideration.

A challenging year for commercial facility managers

Real estate professionals’ job is demanding by nature: among other tasks, facility managers are required to process significant volumes of data, keep occupancy high, locate properties that suit tenants’ individual needs, and find new tenants as quickly as possible when a lease expires. There is no time to waste when negotiating with potential tenants.

Unstable market conditions make their job even more intense. Accordingly, now more than ever, commercial facility managers need reliable tools that will make it easier for them to carry out their tasks successfully.

Office space management software can streamline their entire work process:

·        The system organizes the data in a cloud-based searchable archive.

·        It legibly displays detailed metrics and even indicates which lease agreements will expire soon. This helps property managers maintain maximum occupancy and find new tenants on time.

·        The software can model various space subdivisions that can be used to generate attention-grabbing marketing proposals.

·        Using the system, floor simulations, property photos, and any other relevant document can be effortlessly retrieved and sent to prospective tenants.

·        The system’s built-in functions make it a convenient data analysis tool, capable of reading data from documentation, performing relevant calculations, and exporting the results at the click of a mouse.

 

This way, facility managers can free up precious time for essential matters and avoid monotonous, time-consuming activities as much as possible. This efficiency provides them with a clear advantage over the competitors.

 

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