![]() ![]() Persistent low occupancy in office buildings presents a challenge for commercial real estate developers and investors, says Peter Liu. What can developers do to optimize high building occupancy? And class C buildings-older buildings that aren’t in great shape-will have the toughest time of all. On the flip side, class B buildings-defined by BOMA as buildings with rents in the average range and adequate systems and finishes that are fair to good for the area-are in greater danger of hemorrhaging, Crocker Liu says. “If you have a vacant building where the tenants have moved out, but they still have a 10-year lease with a corporate guarantee, so the cash flows are still coming in, the value of the building is not affected,” he says. If a building’s occupancy is high enough to cover debt service, class A office building owners who have secure, long-term leases don’t have much to worry about. For example, owners of class A buildings-a classification defined by the Building Owners and Managers Association (BOMA) as representing the highest quality and most prestigious properties in prime locations-are on a more secure footing. Professor Crocker LiuĬrocker Liu points to mitigating factors that make a big difference when it comes to low occupancy’s economic impact. At best, reduced demand for office space and market uncertainties can make it difficult to determine the value of office buildings accurately. “As a result, property owners experience reduced rental income, which can have a negative impact on the valuation of the property,” says Peter Liu, who also serves as editor of the Journal of Real Estate Portfolio Management. Low occupancy in office space leads to higher vacancy rates because tenants may downsize their space or not renew their leases at all. Are office buildings dropping in value? Professor Peter Liu Stay tuned for part two, in which architect Suzanne Lanyi Charles, associate professor in AAP and acting chair of the Paul Rubacha Department of Real Estate, addresses the feasibility of converting office space to residential housing. Crocker Liu, Peter Liu, and Suzanne Charles all teach in the Cornell Baker Program in Real Estate. Beck Professor of Hospitality Financial Management, and Peng (Peter) Liu, professor of real estate finance and Singapore Tourism Board Distinguished Professor in Asian Hospitality Management-both Cornell Peter and Stephanie Nolan School of Hotel Administration faculty members-discuss the financial impacts and implications of the phenomenon. Professors in Cornell’s Paul Rubacha Department of Real Estate, which is jointly managed between the College of Architecture, Art, and Planning (AAP) and the Cornell SC Johnson College of Business, weigh in on financial questions in part one of this two-part story. Can they afford that? If defaults become widespread, will more banks fail? Is it feasible to convert office space to residential units and address both the glut of office space and scarcity of housing at the same time? For example, how is it affecting these buildings’ value? Does limited cash flow due to office vacancies mean building owners are in danger of defaulting on their loans? When mortgages come due in the coming year, some building owners will be refinancing at a time when interest rates are rising. ![]() Long-term impacts are just beginning to be felt and are likely to have wide-ranging consequences.įor office building owners, investors, and developers, persistent low occupancy in office buildings raises a lot of questions. Global real estate services company Jones Lang LaSalle (JLL) reports that more than 20 percent of office space is vacant across the United States. ![]() As office workers continue to work from home post-pandemic, office buildings throughout the country remain partly empty.
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