The last few years have presented significant challenges for office real estate stakeholders, and the near term outlook remains daunting. Despite many companies experiencing in-office utilization rates closer to pre-pandemic levels, overall office vacancy rates hit a record high of 19.6% in the fourth quarter of 2023, according to Moody’s Analytics, and are expected to peak at almost 21% later in 2024. That’s putting downward pressure on rents at the same time many building owners are having to refinance maturing mortgages at much higher interest rates.
At least one industry leader has predicted that this perfect storm of higher costs and lower revenue will end up eliminating a third of the supply of office space. However, a recent CoStar study indicates that this dire prediction may not uniformly apply to every type of office building.
Office buildings are categorized into three classes, based on certain characteristics, including appearance, equipment and technology:
- Class C, the lowest tier, includes older buildings with outdated technology that are in need of extensive renovations.
- Class B office buildings tend to be 10 to 20 years old, with many on the older end of that scale showing their age in terms of appearance, equipment and technology.
- Class A office buildings are newer structures in prime locations with top-notch management and cutting-edge technology.
It’s this last category of buildings that is bucking the conventional wisdom. The reason?
Construction of Class A properties has slowed to record lows, while demand continues to rise. The CoStar study found that buildings aged 0-3 years represent 2.4% of office inventory in the U.S., in line with pre-pandemic averages. However, last year was the slowest period for Class A construction starts since 2011, putting these premier facilities on track to make up only about 1% of inventory by 2027.
As the availability of Class A office space shrinks, owners and operators of Class B spaces can tap into the high demand by introducing features that typically attract tenants to these premium properties. Here are four straightforward and cost-effective changes property owners can make to get their Class B or C offices punching above their weight.
1. Put Sustainability in the Spotlight
The number of U.S. jurisdictions adopting building performance standards has nearly doubled since 2020, according to a report by the American Council for an Energy-Efficient Economy (ACEEE). As these climate-related regulations proliferate, organizations are being forced to get more serious about their carbon footprint. In fact, 57% of respondents to FM:Systems’ 2023 Inside the Workplace survey said that sustainability will be a higher priority this year than it was in the past. This is adding to the appeal of Class A spaces, which are typically more energy-efficient.
Class B spaces can enhance their sustainability bona fides by integrating technology solutions that facilitate greenhouse gas emissions reporting and enable occupants to monitor and manage sustainability performance. Furthermore, while sustainability initiatives are increasingly becoming compulsory, there remains considerable marketing and brand-enhancement value in setting and achieving sustainability goals.
2. Consider High-Impact Equipment Upgrades
One of the appeals for tenants moving into a higher-end office space is they won’t be dealing with flickering fluorescent tubes, inoperative elevators, or loud, rickety HVAC systems. Investing in high-impact equipment upgrades, such as workplace occupancy sensors and digital twins, can enhance tenant experiences, increase rent potential, and minimize unplanned outages and costly repairs.
Additionally, many advanced workplace technologies that were once viewed as “nice to haves,” like indoor air quality (IAQ) sensors and utilization sensors, are now more affordable, making them more accessible for organizations to integrate into their offices. Even improvements in battery life performance and the ability for smart devices to easily connect to different workplace management solutions means more organizations can leverage data-driven insights about building performance and utilization in order to identify major cost-reduction opportunities.
3. Demonstrate Your High IAQ
Poor indoor air quality (IAQ) has been linked to low productivity, increased stress and diminished cognitive function in employees. That’s a big reason Class A buildings tout state-of-the-art HVAC systems with advanced filtration systems and other features. Class B facility managers can follow suit by upgrading their ventilation systems and combining environmental and occupancy sensors with dashboards that provide real-time information about IAQ in specific areas of the office or floors within a building.
Sensors can also be used in conjunction with workplace management systems to track and control other factors that can impact employee comfort and wellbeing, like temperature, humidity and light. These solutions present the added value of being useful for increasing operational efficiency and reducing energy consumption.
4. Don’t Skimp on Security
Class A buildings often feature top-of-the-line solutions to keep occupants safe and secure. Fortunately, many of these features can be replicated in older buildings through the use of devices such as access sensors, surveillance cameras, visitor management systems and access control systems. Integrating these solutions into a robust workplace management system allows for real-time monitoring and can help enable a quick response to potential threats. These smart building solutions can also detect hazards like smoke, fire, gas leaks or suspicious activity and automatically notify authorities.
Despite the uncertainties ahead for office real estate stakeholders, recent trends suggest that the worst-case scenarios may not materialize. For example, half of respondents to the FM:Systems survey reported that employees are spending more time in the office than they were a year ago, and 60% of business leaders want employees in the office full time. Recently, household names like UPS, Boeing and JPMorganChase joined a growing list of companies that have announced plans to require their employees to return to the office full time. With more employees returning to the office, the shortage of Class A space is expected to intensify, presenting a greater opportunity for Class B owners and operators to elevate their buildings above the rest of the pack.
