This is not the first time that a death sentence has been issued for the office sector. Just after the September 11, 2001, terror attacks, adjectives associated with the next generation of office structures included progressive collapse, bollards and secure perimeters. Premiums were placed on buildings deemed safe and secure, meaning that standalone suburban structures with parking all around them were sought after, while urban offices fell out of favor.

By 2010, as the events of September 11 faded, transit-oriented, mixed-use and walkability emerged as characteristics that made office buildings more valuable.

Another decade later, when the pandemic began in 2020, sought-after office buildings had evolved to include activated lobbies, shared coworking spaces, and numerous amenities both inside and within walking distance from the building. The pendulum had swung back completely, with buildings in urban or urban-like, mixed-use settings generating demand and premium pricing.

Today, roughly three years after the start of the global pandemic, questions about the future of office as a concept, as well as a place, are swirling, just as they did after 9/11. To help understand how commercial real estate professionals are sorting through the complex and costly issues surrounding the reinvention of the office sector, LoopNet spoke with four specialists who shared a variety of assessments and outlooks on how to move forward, make offices work today and avoid obsolescence.

Steve Martin is the managing principal at SDM Partners, a developer, investor and operator in the southeastern United States. Martin told LoopNet that “nobody knows what demand is,” for office assets.

“Twenty to 25% of the office buildings in this country are obsolete, either locationally or physically, if not both. And they're either going to be torn down or they're going to be repurposed.”

Martin has done both. In early 2023, he tore down a 110,000-square-foot office building to make way for 80 for-rent townhouses. “Right next to it, I had a 10-story, 295,000-square-foot office building that we rezoned to turn into 216 apartment units.”

For real estate developers, an uncertain entitlement process can add significant costs to a project, making it financially untenable. So, if communities want to improve their tax rolls by converting underperforming office assets, “municipalities have to get on board with this repurposing,” Martin said.

“Buildings that I would have bought five or 10 years ago, I won't buy [today]. Just being a nice building with a bunch of parking in the suburbs is not good enough. It's all about being where people want to be. It needs to be cool, and it needs to be walkable,” Martin said. He acknowledged that “cool is somewhat subjective,” but added that “with enough money, you can do it.”

He noted that decades ago, in the suburbs, office buildings anchored locations and employees commuted to those places, and over time, eateries, hotels, retail and housing got built around them.

“It's the exact opposite now; the office comes last. They're taking it and bolting it on to these activity centers where people [already] want to be, [making office] the last piece, not the first piece,” Martin said, so investors need to be on the lookout for these types of locations or they need to be prepared to create places and not just offices.

Dale Dekker, an architect and developer based in Albuquerque, New Mexico, recalls working with clients just after September 11. The U.S. General Services Administration, which among other things, oversees real estate for the Federal Government, began to emphasize “guidelines that impacted federal facility design and security requirements,” Dekker said.

These guidelines were revised after the bombings of the World Trade Center in 1993 and the Alfred P. Murrah Federal Building in Oklahoma City in 1995. They included complex and extensive design, engineering and construction specifications to mitigate blast vulnerabilities and progressive collapse of structures.

They were not embedded in the local building codes, Dekker said, but certain owners with public sector tenants at the state, county or city level, “were concerned about these requirements.”

For the most part, private sector clients, unless they had public sector tenants in their building, probably just viewed it as good enough to be able to secure the perimeter of a building. But no additional structural requirements or redundant systems to mitigate catastrophic failure became commonplace, Dekker noted.

However, because of these safety requirements, there was tremendous concern among owners for several years following the 9/11 terror attacks, that their downtown buildings would not get leased because they were difficult to secure, especially those with underground parking.

Eventually, as memories faded and the private sector pushed back against the realities of paying for “hardened” buildings capable of mitigating collapse from explosives, even the Federal Government modified some of its requirements and generated guidelines that married security with amenities and building accessibility.

“I went through 9/11,” said Stephen Silverstein, a principal and managing director at Avison Young for U.S. studio projects and construction management. “I was down in the World Financial Center … and in the Towers when the bomb went off in 1993."

“It was a big part of my life, and I watched the shifts,” Silverstein said. Today, he said that in many major cities, he still sees bollards and security guards, “but I also see how people have forgotten [what happened] 23 years ago,” adding that he is conscious of how cars are pulling into buildings “and not being checked like they used to be.”

“People get comfortable and they forget; that works to our disadvantage, but also to our advantage,” Silverstein said. The market comes back because “people repopulate and feel more comfortable.”

He added that as the office sector works through the current transition, “where firms are upgrading and requiring different kinds of space, we cannot forget the things that were important to us 20 years ago and [we need to] bake them into what we do moving forward.”

What's interesting today, Dekker said “is this transition and change of national agendas to drive carbon neutral and net zero buildings,” and that the Inflation Reduction Act has put in place a variety of incentives relative to transferable tax credits and other inducements.

“Figuring out how to deploy smart building systems and sensors into existing buildings to make them more efficient,” is the challenge, Dekker said, adding that not all existing buildings can be adapted cost-effectively, so some will need to be repurposed for other uses or demolished.

A 1980s office building for example, even with tax incentives, will likely not pencil out if the goal is to make it an energy-efficient modern office building, he said. Floor-to-ceiling heights in those vintages can’t accommodate the HVAC and air filtration components found in modern buildings, and large floor plates don’t lend themselves to what are now expected features like natural light and fresh air.

To make carbon-neutral and net zero buildings financially feasible, Dekker said premium rents will be required from tenants. Based on a net zero office building he is currently assessing in Albuquerque, that rent needs to be about 15% above market at this point in time. However, Dekker added that “there are users who have ESG corporate mandates that are willing to look at the additional cost in order to achieve net zero.”

Apart from amenities, greater energy, water, carbon and waste efficiency will be the focus of future office buildings “and I think that's going to be the opportunity and the challenge,” Dekker said because the capital expenditure required “to bring old buildings up to any kind of carbon neutrality relative to energy efficiency … is going to be pretty expensive.”

A recent assessment by Avison Young found that about 9,000 office buildings in North America lend themselves well to residential conversions, a practice that many are contemplating to address the oversupply of older buildings. Sheila Botting, principal and president of professional services for the Americas at Avison Young, told LoopNet that some of the criteria used to identify viable candidates for conversions include location, the shape of the floorplate and cost.

Botting said the overarching question about location is: will a neighborhood have the necessary amenities, transportation infrastructure, retail and safety to make the area work as a residential community?

Concerning the floorplate, “typically, rectangular buildings are much easier to build out than square buildings,” Botting said, and a 15,000-square-foot floorplate provides a good distance from the core of the building to the window, so people don’t have to “live in 10-foot-wide tubes with a window at the end.”

Determining the costs required to gut the building and install plumbing, kitchens, washrooms, life safety systems, storage, etc. is critical and “that feeds into the business case for viability,” Botting said. She added that ultimately, it is a question of the building economics working, relative to the market it is in.

If the numbers don’t work, Botting said some municipalities are offering relief to investors by providing tax incentives to close that gap. She cited Calgary, Alberta as a municipality that is actively doing this for about a dozen office building conversions currently underway. “That's what we [Avison Young] spend a lot of our time looking at today, the gap between economic rent and market rate.

Concerning evergreen characteristics of office buildings that stand the test of time, Silverstein indicated that a building lobby can play a critical role in determining if an office building is a good candidate for an upgrade or conversion. The size of the lobby, the natural light coming in, and the positioning of the lobby when one walks through the doors are foundational. “The thing that we're focusing on with our clients is the experience, and it starts when they walk into the building,” whether the use is office, residential, or something else.

Preserving historic structures and enhancing historical elements also adds to the timelessness of a building, Botting said.

Operable windows are also a desirable feature, Silverstein added. In cities like New York, many of the older buildings were “built with operable windows and people are seeing the value.”

Some new buildings are being built with operable windows equipped with safety features, Silverstein said, adding “that is something people want for wellness purposes. They want fresh air, the ability to go outside and have the outside come into the space.”

“I would say that this too shall pass in terms of the dip in the [office] cycle,” Botting said, noting that the average tenant signs a 10-year lease, and as leases expire in the current cycle, some tenants may contract or reduce their footprints, but most “still need a place to go every day.”

“People want to be connected. So, the question is not whether or not the office is alive and well, the question is: ‘What is the role and the definition of the workplace?’ And that's really what companies are solving toward, developing their own definition” of community and place, she said.

Botting further posited, “Is there a call to action to rethink some of our downtowns and how we might provide great communities and ecosystems for people to live, work, play and learn in? Absolutely.” She concluded that each city and the people in it need to “reimagine what that downtown community can look like, and then get busy on developing and advancing a strategic plan to make it viable again.”