Is Commercial Office Space Headed for Darker Days?
Based on factors of increased interest rates, the pandemic creating opportunities to work from home that have stuck, and much of the previous office lease terms expiring has created a trifecta of trouble looming over the commercial office sector.
Across the nation, the market is witnessing a concerning trend of office space vacancies, with approximately 20% of office spaces sitting empty. This figure surpasses the vacancy rates experienced during the 2008 global financial crisis, indicating the severity of the current situation.
In 2022, Northwest Arkansas had a lower vacancy rate of 8.4%. In the first half of 2023, the office vacancy rate increased to 8.8%.
There is currently 1,230,224 sqft of office space available in NWA. Of the office submarkets, retail had the most space available at 854,634 sqft, while medical offices had the least available at 182,997 sqft. Northwest Arkansas has been relatively insulated from the nationwide trend.
Despite some tenants renewing their spaces, most commercial buildings face increasing vacancies due to lower space utilization. As initial term leases expire, this trend will continue with even more vacancies. Additionally, landlords may need help with refinancing rates increasing from 4% to 9% after the initial loan period due to less rentable areas within office buildings. Refinancing could be difficult, especially with higher interest rates. For example, the original loan was 1 million dollars, and they locked their rate at 4%; the principal payment was roughly $4800/month. That amount financed at a 9% interest rate is about $8100/month, a 41% increase in payment. This issue is more widespread nationally than in Northwest Arkansas, but it is expected to soften the office commercial market in the coming years.
It’s not just landlords feeling the pinch. Consider the white-collar businesses that surround these vacant offices. When a problem arises, there are always ripple effects to consider: What will happen to the coffee shops that used to have frequent customers from those office buildings?
In times of crisis, innovation often emerges as the savior. Here at NWALook, we believe there are a few opportunities worth exploring to address these issue.
Short-Term Leasing: One possible solution is short-term leasing. These spaces can be leased for conferences, pop-up events, day yoga, day photography, bridal conventions, and e-commerce operations. The key is to make your space inviting, unique, easy to book online, and to network with surrounding businesses. This approach allows landlords to keep some income flowing while seeking long-term solutions.
Loloft in NWA is currently offering short-term leasing. Check out the Loloft, website for additional information.
Shared Spaces: Another strategy is renting smaller spaces to multiple businesses or offering desk rentals. The concept of shared spaces has gained traction in recent years, and it’s proving to be a flexible solution for businesses looking to adapt to changing office demands.
Converting office space to residential use can be challenging due to factors such as plumbing, shared walls, and meeting the demands of residential tenants. Although, we have seen examples of big box retailers, such as Sears and Bed Bath and Beyond, backfilled with Crossfit Gyms and trampoline parks, heavy residential backfill of office space is unlikely. This is because the financial costs associated with repurposing the space outweigh the ease of conversion, even if zoning allows it.
The office crisis is not on the horizon; it’s here. With rising national and local vacancy rates, businesses, landlords, and local economies face challenges. However, as challenges arise, so do opportunities. Exploring innovative solutions like short-term leasing, creative financing, and shared spaces can help mitigate the impact while paving the way for a more adaptable future in commercial real estate. The road ahead may be uncertain, but resilience and creativity can guide us through these uncharted waters.