Your guide to commercial real estate leasing and investing

Commercial Real Estate Trends in 2023: Repurposing, Reuse, and Redevelopment

There is no doubt that the pandemic caused a shift in the way many businesses operate. Without warning, companies and their employees had to adapt to online, remote or hybrid operations. Office spaces and warehouse buildings in large parts of the country briefly stood empty. Valuable, customer-facing careers had to hit pause in order to protect the public.

commercial real estate trends

Fast-forward to today. Although the pandemic’s initial risks are no longer as emergent, the long-sustained workstyles and spaces of company culture has been forever changed. In commercial real estate, this pivot outputs one response: vacancy.

Because of these widespread vacancies, the Dallas-Fort Worth area is undergoing a major shift in commercial real estate. Many office buildings are being converted into multi-use, multi-level complexes, with office spaces on the top floors and residential units on the lower levels. Others are being turned into storage spaces or divided into coworking units. Why?

At the end of 2022, it was recorded that 26% of Americans were working from home — a significant decrease over the 71% recorded in 2020 at the height of the pandemic. However, this percentage of work-from-home employees is also a startling rise from only 6% recorded in 2019. Today, many commercial real estate investors must face a new reality: three-quarters of previously occupied office space now sits vacant.

 

Vacancy Rates in the Dallas-Fort Worth Region

The office vacancy rate in DFW is a major concern for property owners. The Metro’s office market has been facing a declining vacancy rate for several years, and it has recently reached its lowest level. Specifically, the Dallas office market is one of the most competitive in the U.S., with vacancy rates rising steadily since 2016. Throughout 2017, the average vacancy rate was 15%. Despite the growing job market in DFW, the city has reached 25.3% vacancy, its highest vacancy rate since the 1980s.

Frisco — another populated metro area that’s seen large development projects in the past five years — it experienced an 8.17% vacancy rate in 2021. This was only a small increase compared to 2019 and 2020, which both fluctuated from 6% to 8%.

The reason for vacancy rates taking a large hit in Dallas-Fort Worth is multifaceted. The booming economy in Dallas has created more jobs and driven greater demand for office space. However, new construction has been limited, making it difficult for businesses to find suitable office space. This has led to an increase in competition for select units while many others remain vacant.

Additionally, the Dallas-Fort Worth area experienced a significant spike in housing costs in 2022. This greatly impacted and continues to affect homeowners and potential buyers. From 2021 to 2022, the median market price for a home rose 11 percent year over year. Such price increases forced many buyers out of the market and into renter situations, ultimately causing climbing lease costs.

Whether renting or buying, residents have opted to make financially-savvy decisions to live further away from the city. Smaller suburban areas provide a lower cost of living, but ultimately demand workers to make longer commutes into the professional commercial hubs. Many people who experienced pandemic work-from-home options now prefer remote positions, further driving up vacancies as companies accommodate the workforce.

As a result of these challenges, mixed-use developments and adaptive reuse projects are becoming treasure troves to property owners and developers alike.

 

Adaptive Reuse Incentives in Dallas

In Dallas, to curb the rising vacancy, the Dallas City Council approved a tax incentive program that provides financial assistance to developers who are undertaking adaptive reuse projects. This program is expected to help reduce the cost of renovating old properties, making adaptive reuse a more attractive option for developers and property owners while promoting economic development and growth.

commercial real estate trendsThanks to this tax incentive, Dallas saw an impressive transformation of over 4.5 million square feet of commercial space in 2022. Properties throughout were converted into vibrant residential and mixed-use buildings. One popular tower in downtown Dallas is currently being renovated and repurposed into multi-family units. Several senior living companies in Dallas are also turning to existing properties for adaptive conversion rather than expensive construction for new living centers.

As the tax incentive still stands this year, it should be expected that similar ambitious redevelopment projects will boom in 2023.

 

Redevelopment Opportunity in 2023

In a survey conducted by the Dallas Business Journal, researchers found that adaptive reuse projects are the most popular among developers and investors. Adaptive redevelopment promises a high potential for ROI, and proves to be a more environmentally-responsible practice for the development process.

On average, developers save upwards of 18% on construction costs redeveloping an existing building as opposed to building from the ground up. Minimal waste, less time spend and greater community involvement also make redevelopment a worthwhile undertaking in the commercial real estate market today.

Starting the new year off strong, millions of square feet are available for potential redevelopment. Overall, adaptive reuse projects are proving to be an monetarily attractive and sustainably effective way to breathe new life into vacant commercial real estate in the Dallas-Fort Worth region.

Looking ahead to 2023 and beyond, adaptive reuse of office space is not simply a quick real estate trend. It’s likely to continue as more businesses, commercial property owners and developers look to take advantage of the unique opportunities available in their communities.

 

Other posts: