Empty Office Buildings - What's Next?

Real Estate This Week

This episode of Real Estate This Week explores the ongoing crisis of empty office buildings across America, driven by the shift to remote wo

Key takeaways

• Only about 25-30% of office space is suitable for conversion to residential use due to factors like natural light and outdated mechanical systems.
• Detroit serves as a success story with revitalization efforts led by Dan Gilbert, including the Hudson's Tower project that combines offices, retail, and housing.

Main topics

• The decline of traditional office spaces post-pandemic
• Feasibility and challenges of converting offices into residential units

Notable quotes

"You've got to have an intermediate size building. The mechanical systems and the technology in the building can't be outdated."

Conclusion

While the future of empty office buildings remains uncertain, repurposing offers a viable path for

Transcript preview

Speaker 2 (0:03) This is Real Estate This Week with Stephen Gaskell. 17 years on air and online, helping you succeed in buying, selling, and investing in property. The best real estate strategies out there just for you. Speaker 3 (0:24) Welcome to Real Estate This Week. Hi again, I'm Stephen Gaskway, and I'm so glad you're here as we look at what's next for empty office buildings. That's right, so many office buildings never recovered after so many people left to work from home. Millions of square feet in those buildings remain empty, and so far there's no clear path forward. But There are ideas, some that work and some that don't. Let's talk about it now with a commercial real estate expert. Joining us is Bill Milliken, Realtor and Broker Owner of Milliken Realty in Ann Arbor, Michigan, the former president of the Michigan Realtors, and also the former president of the Commercial Board of Realtors in Michigan. Bill also served as a regional vice president at NAR and was chair. of its commercial committee. And currently, he's one of seven members of Michigan's Mackinac Bridge Authority. Bill, welcome to Real Estate This Week. Speaker 1 (1:33) Glad to be back at Real Estate This Week. Thank you, Stephen. Speaker 3 (1:36) I am so glad you're with us. So first of all, Bill, how's the real estate market in Michigan? Speaker 1 (1:42) Well, office space is not jumping off the shelf, but that's a national trend. That's not unique to us here. Industrial and retail are in pretty good shape. Detroit has had some tremendous successes in revitalizing downtown Detroit, owing largely to Dan Gilbert. You may know him through Quicken and Rocket Mortgage. He's also the owner of the Cleveland Cavaliers, and he's invested heavily in the Detroit market. Principal among them is the new Hudson's Tower. That is 49 stories and 1.5 million square feet of office, hotel, condominium, and retail. And it's on top of the old Hudson's apartment store site, which is famous in the city. General Motors has moved their headquarters from Renaissance Center into Hudson's Detroit. And so they're the anchor tenant. They were very proud of the way the building's developing. Speaker 3 (2:45) Interesting, Bill. And you know, that sort of brings me to the first topic I wanted to ask you about, and that is office buildings. Now, here you are explaining that there's a brand new giant office building going up in Detroit. Now, doesn't that sort of buck the trend that office buildings are really in trouble? Speaker 1 (3:08) It does, but city center Detroit is unique. Primarily because of the Gilbert Holdings there, 17,000 of their employees that they have moved from suburban locations around Detroit back down into the city. They have acquired, restored, and remarketed a lot of Detroit's old historic building stock. One of the things about Detroit being passed over during the last decade when a lot of other cities were booming. was that nobody was looking at Detroit. So a lot of the old historic architecture that's now prized is still there. And Dan Gilbert has acquired it, restored it, made it historically accurate. And that space is in demand and selling. A lot of prime retail has moved back into downtown Detroit on Woodward Avenue. There's a new Apple store. Gucci is there. Warby Parker is there. A lot of... new, vibrant retail. So it's a great place to come down for a Friday evening and find a restaurant and spend a nice, pleasant, urban moment. That Speaker 3 (4:15) sounds great. You know, Bill, it has been a while, but I have been to Detroit many, many times. And I love that city. And I love the fact that it is coming back strong. So let me ask you a few questions now. As we all know, back when the pandemic began, a lot offices emptied out because so many people were working from home. Now you just mentioned a success story but let's look now at the bigger picture. Have offices recovered from that or are they still empty all across America? Speaker 1 (4:51) In a word, no. But we've got several tiers of office space. We've got Class A office space, which is either new or maintained at a very high level, which obviously commands the highest price in the market. We've got Class B in spaces which are older, showing a little wear, not maintained at the top of the notch anymore. And Class C, which is some of the very plain functional space that sometimes startup businesses get into or businesses that have been there for a long time and don't need a premium location. But if we look at office space in total, the architects will tell you that maybe 25 to 30 percent of it lends itself to conversion, one of the requirements for residential use. in old office space is natural light. So if you've got a large floor plate, nobody wants to live in the center of a large floor plate with no windows. So you've got to have an intermediate size building. The mechanical systems and the technology in the building can't be outdated. Old steam boilers aren't going to cut the mustard very well. So that eliminates a lot of office vacant properties from development for conversion. In San Francisco, the exception was one high-rise office building there with big floor plates. They went to the expense of driving a core down the center of the building to provide natural light for the interior square footage. And that worked, but that was also very expensive. And there aren't a lot of buildings that lend themselves to that kind of capital improvement. Speaker 3 (6:32) And, you know, Bill, I'm really glad that you brought this up because As we know, back when so many offices were empty and people were wondering what is going to happen to these