WASHINGTON, DC–There is a CBD office building that is currently empty except for one retail tenant on the ground floor. This building recently underwent a renovation — unfortunately it wasn't the right renovation that apparently is necessary for commodity Class A buildings these days.
Class A commodity has been in trouble for some time as tenants continue their march to quality. Almost every category it seems — trophy, class B, even suburban office — has a constituency except for commodity Class A.
Now as the number crunching for Q3 is done it is clear that some reckoning will soon be at hand. According to Newmark Knight Frank's 3Q 2017 office market report there was 2.1 million square feet of net absorption of Class A property type in the first 9 months of 2017. This compares to 354,657 square feet for the same period in 2016. However this growth was driven by trophy space demand, Senior Managing Director Sandy Paul tells GlobeSt.com.
“Owners of commodity Class A have a tough call to make right now,” Paul says. They can either 1) invest capital in a top-notch renovation or 2) lower their expectations and lease the property at Class B rates to Class B tenants or 3) consider raising and rebuilding the property, he says. A renovation that brings the building to a Class A minus status like the unfortunate — and completely empty — CBD office underwent no longer cuts it in this environment, he says.
According to Paul, some of these owners are having come-to-Jesus conversations about their buildings, discussing their predicaments with brokers. Which route they will opt for remains to be seen.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
