The Platform

Richard Walker; Vecteezy; Photo illustration by John Lyman

Real estate firms that adapt quickly and upgrade their properties stand to prosper in this post-pandemic economy.

In the world of commercial real estate, a wave of change is sweeping across urban landscapes. As high-end office buildings plunge into bankruptcy and suffer growing vacancy rates, the broader industry grapples with a decline in value and financial instability. The problem isn’t confined to a handful of cities; it’s a national phenomenon.

Today’s commercial real estate faces a deluge of debt brought on by changing market demands. Many corporations have permanently shifted significant portions of their workforce to remote work, causing vacancy rates in various buildings to skyrocket, impacting their overall worth and stability.

In one recent video discussing new acquisition opportunities in commercial real estate, the host enthusiastically oversimplifies what may be available in certain cities. With giddy anticipation, he heralds the prospect of distressed properties entering a fire sale mode. According to the host, this will allow potential buyers to get a bargain and acquire buildings at a steep discount. But is this really a golden opportunity?

The so-called fire sales on vacant commercial properties might appear to be bargains, but are they anything more than a mirage? The harsh reality is that previous owners lost tenants, and replacing them will be no easy feat. Many of these buildings are technologically outdated, and returning them to market competitiveness with remaining corporate tenants will require substantial investment in upgrades like redundant power and network connectivity. Additional intelligent amenities like wireless capabilities may also be necessary.

If you’re seeking these commercial bargains, remember: “Junk is still junk – even at a discount.”

The commercial real estate industry has been slow to recognize the necessity for supporting today’s corporate tenants with mission-critical applications. Many buildings lack the intelligent amenities or digital infrastructure to fulfill these requirements. Property owners have been reluctant to upgrade their buildings, instead betting that they will still find tenants even with discounted pricing. But those days are over.

In the current market, the rules of the game have changed. You now face a glut of office space with dwindling demand from corporate tenants. Premium leasing spaces are those equipped with intelligent amenities like redundant power and network connectivity. The rest will become increasingly undesirable, and some buildings might require complete repurposing.

The notion of repurposing is frequently touted as a panacea, but it won’t resolve all the issues. While some buildings may be easier to convert than others, limited demand for alternative uses, such as residential spaces, restricts how many buildings can be successfully transformed.

Some owners might turn their office buildings into storage facilities, chopping up the floor space into small cubicles for rent. But this solution works only on a limited scale. Repurposing alone can’t answer the fundamental question: “What do we do now with our building that is half-vacant?”

Now is the time to evaluate the necessary intelligent amenities to make buildings marketable for the demands of 21st-century tenants. Most real estate firms have lagged behind in these vital upgrades.

Academic programs in real estate and property management must also adapt, moving away from outdated 20th-century concepts to address today’s complex marketplace. The idea of intelligent buildings has been around for decades, but both the traditional real estate industry and higher education have been slow to understand and apply these principles.

Real estate firms that adapt quickly and upgrade their properties stand to prosper in this post-pandemic economy. Those clinging to obsolete strategies risk seeing once Class A buildings downgraded to Class B, simply because they can’t support the new age of corporate needs. The stakes are high, and the industry must rise to meet this challenging but potentially rewarding frontier.

James Carlini is a strategist for mission critical networks, technology, and intelligent infrastructure. Since 1986, he has been president of Carlini and Associates. Besides being an author, keynote speaker, and strategic consultant on large mission critical networks including the planning and design for the Chicago 911 center, the Chicago Mercantile Exchange trading floor networks, and the international network for GLOBEX, he has served as an adjunct faculty member at Northwestern University.