009. Trending Now: Converting Office Spaces into Industrial Spaces

Episode Transcript:

In a shift away from the previous trend of converting industrial buildings into offices, the commercial real estate market is witnessing a rise in the conversion of office spaces into industrial warehouses. This emerging trend is gaining momentum as developers recognize the potential value of repurposing office buildings for storage and logistics purposes.

According to Elizabeth Berthelette, a research director at Newmark, a majority of the 15.2 million square feet of converted space analyzed in a recent study involved new construction of purpose-built storage buildings following the demolition of office stock. The lower per-square-foot cost of industrial spaces, compared to residential or office spaces, makes them an attractive option for repurposing. Additionally, the simplicity of construction in industrial warehouses, characterized by large open spaces, contributes to the cost efficiency of these conversions.

The conversion of offices into industrial spaces represents a reversal of the previous trend that prevailed in the 1990s and the early 21st century. During that period, old industrial buildings were transformed into offices to accommodate technology-driven industries like advertising, media, and information companies. However, the higher costs associated with producing office spaces, including elaborate materials and finishes, make industrial conversions a more economically viable option.

The changing landscape of the commercial real estate market has also given rise to innovative solutions for unused office spaces. Companies like Neighbor Storage, based in Salt Lake City, are finding opportunities to utilize surplus commercial real estate, including office buildings, for self-storage purposes. This diversification allows for the repurposing of vacant offices, helping to address the high vacancy rates seen in some cities.

While office landlords initially held onto the hope of tenant returns, the prolonged absence of tenants has led them to acknowledge the permanence of the situation. Many office buildings are burdened with significant debts and a need for income, making industrial conversions an appealing prospect.

Previously, office-to-industrial conversions were mainly observed in suburban areas due to the suitability of low-rise buildings surrounded by ample parking space. However

Urban landlords are now exploring the idea of utilizing the lowest floors of office buildings for storage purposes. Although challenges such as heavier load-bearing requirements and zoning issues exist, these conversions offer an opportunity to monetize underutilized spaces.

It is important to note that the demand for industrial space may be slowing, as rising interest rates and inflation impact the demand for bulk industrial spaces. Nonetheless, the recent boom in the industrial sector, driven by the surge in e-commerce during the pandemic, sets the stage for potential growth in the industrial real estate market.

As the commercial real estate landscape evolves, the conversion of office spaces into industrial warehouses presents a cost-effective alternative that can help revitalize vacant properties. While challenges and potential limitations exist, the adaptive reuse of office buildings for industrial purposes offers a promising avenue for addressing the changing needs of the market.

This is Tyler Cauble, signing off.