I’m not understanding. The pandemic is in the rear view mirror, volatile economic conditions, many firms have already realized there’s no need for substantial amounts of office space, etc, yet office is still not back and even arguably, on an even further downtown. Class A trophy assets in big markets will be fine, but the balance? I’m not really understanding what the path forward is.
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No one understands what the path forward is yet - that's what we're going through. Eventually the path forward is clear, even if it's just an absolute bloodbath and teardown situation, but no one really knows yet. It is definitely not going to be a universal "office is fucked" or "office is so back" though, as you alluded to with your comment about Class A trophy offices. The return will inevitably vary by location, type, class, etc.
Honestly I think that’s because you’re thinking about the uses of the product as it historically was- you (we) need to expand our creativity and perspective on these assets.
Everything you’ve said is correct- what’s missing is a new use for the product. Take what’s not valuable, and turn it into something people can use. That’s a lot of money to be made, if individuals can figure out how to make these products into something more.
The uses are readily identifiable. The problem is that conversion is incredibly complicated, expensive, and time-consuming.
We can't just say, "Oh ok, just turn them into multi or data centers or light industrial."
Then we need to get creative- my statement stands.
Supposedly there’s $90B in office development going on currently. Although I think a decent portion of that is for build outs and what not.
There will always be a fundamental need for ‘some’ office, as certain industries essentially need to be in person on a regular cadence.
Major occupiers will flock towards trophy assets, taking less space than before in order to balance out the rate premium. Subsequently rates here should remain elevated.
Suburban Class B/medical should also stick around in pockets (think local accountants, doctors offices, etc).
Where office will fall off is poorly located or poorly amenitized Class A (which has proven to be many more offices than anticipated pre-pandemic), and nearly all other Class B/C.
Owners of these buildings won’t, and oftentimes can’t, fund significant TI in order to try to obtain tenancy (i.e. downtown LA).
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