What To Do With That Glut of Office Construction

COVID-19 came on the heels of a glut of office construction in some markets. Now that the realities of the pandemic have sunk in, attention is turning to what will become of that excess inventory. 

“You look at San Francisco, and there has definitely been a boom in office construction in the last decade,” says Nima Wedlake, principal at Thomvest Ventures. “For the most part, those offices are getting leased up before construction is completed. The Salesforce tower was getting leased at record-high rates.”

But the tech companies in San Francisco are letting workers telecommute well into 2021, if not permanently. “Outside of our interest in real estate, we have a portfolio of technology companies, many of whom are based in San Francisco,” Wedlake says. “Every single one has announced a work-from-home policy that will extend into 2021. I think that’s table stakes at this point.”

With this movement towards telework, Wedlake thinks it will be hard to fill those towers in San Francisco, much less underwrite news ones.

“I think there is too much uncertainty to underwrite a commercial office construction project in a place like downtown San Francisco, where the model only works if you can get $95-plus per square foot from one of the blue-chip tech companies,” Wedlake says. “There is too much uncertainty around what the future will hold to be able to underwrite that and finance a project like that successfully.”

Ultimately, Wedlake thinks there will be a long lull in underwriting office projects in cities, such as San Francisco. “You’ll probably see a halt, which might mean less new supply hitting the market,” Wedlake says. “Maybe the existing supply will rebalance demand.”

Wedlake wonders if some of the excess office buildings may change uses. “We’ve already seen some conversations about converting offices to residential when applicable, and we’ve actually seen some startups that are trying to enable that,” Wedlake says. “I could see under-utilized office space getting converted into residential space in some of these big cities.”

While Wedlake sees a slump in the office market, he thinks people will eventually end up back at work around their coworkers.

“When everyone is fully remote, the only way they interact with your coworkers is on Slack or via email or on Zoom,” Wedlake says. “I think there is something to be said about the serendipity of being in an office environment and in a dense city, like New York or San Francisco. And there are opportunities born out of that serendipity.”

That desire to be around people convinces Wedlake that there will probably be a hybrid office structure after the pandemic. 

“People might be encouraged to come into an office two to three times per week, in order to get that face time or network in real life with their coworkers,” Wedlake says. “For the balance of the week, they’ll be able to work from home or in a remote environment.”