What began as a strictly San Francisco Bay Area malady has spread to become a nationwide plague — mounting vacancy of commercial building space. In the past year, nearly 60 million sq. ft. of office space was available in the San Francisco area alone.
Business downturns fueled by corporate scandals, insider trading, rising unemployment and growing fears of deflation are the viruses spreading the disease. Design professionals are being consulted for fast pain relief. As tenant improvement allowances soar, creative new uses of empty office space are appearing.
With a creative approach it's possible leaseholders can prepare surplus space more aggressively for sublease, and building owners can find ways to make public spaces more attractive. Or more drastically, converting buildings to an entirely new use can be developed into exit strategies for beleaguered commercial building owners.
Among the most effective strategies for improving marketability of space is visual improvement of common lobbies. Functional issues might include circulation, security and lighting while more refined design improvements can include wayfinding, signage and upgrades of materials, colors and furnishings. Lively graphic presentations of colorful streaming information about business and neighborhood attractions also can yield a sense of full occupancy.
When an improvement in lobby common space creates a more attractive building for potential tenants, and lease-up occurs more rapidly and at higher rates, a result is that a building's overall valuation is increased through improvement of gross monthly rental income. For example, if a tenant space of 50,000 sq. ft. was able to achieve an additional 25 cents per sq. ft. per month in response to this type of improvement, depending on the capitalization rate, such a rent increase could translate to more than $1 million in overall market value — easily offsetting the cost of the improvements.
As owners look at their empty buildings and many tenants are finding that their space needs have downsized, both are presenting “plug-and-play” sublease space solutions to the market without necessarily any assurance that such increased investment will bring instant leasing. The approach is an aggressive and costly one involving dropping in systems furniture and cabling into empty space so it's ready to be occupied by start-up businesses working from rapid business plans.
Often master leaseholders use their tenant improvement (TI) allowances to subsidize the cost of the furnishings, which can currently be obtained at grossly discounted prices. The ready space allows tenants to move in quickly with minimal changes.
Plug-and-play sublease strategies require patience. One Silicon Valley firm that originally leased 12 floors of a newly built high-rise office for its own use discovered that its subsequent downsizing freed two full floors of the high-lease space. The firm then made an investment of $45 per sq. ft., tapped from available TI dollars, and completed speculative tenant improvements and installed systems furniture. This allowed the firm to offer ready-to-go space to the sublease market — equipped with systems furniture and cabling. In spite of the aggressive investment, over the past six months no sublease tenants have appeared.
Conversions From Commercial Use
For owners of empty office buildings, more drastic solutions may have appeal. Two factors have combined to create what was previously unthinkable on a large scale — conversion of office buildings to residential units. Those factors include a depressed commercial market fueled by business downturns and a stable residential market powered by low interest rates. This approach echoes similarities to the surge in conversion of urban industrial buildings to loft residences. The litmus test of conversion feasibility is a cost/value comparison of staying the course with the commercial usage versus converting to residential usage.
Until economic shifts bring renewed growth for businesses across the nation, design professionals will continue to offer creative solutions and exit strategies.
John Walsh is senior vice president and national director of project development services for HDR, an architecture and engineering consulting firm. He can be reached at [email protected].