Dated office buildings, even four-star properties classified as commodity Class A, continue to struggle to maintain occupancy and have had difficulty replacing tenants who move out. As tenants increasingly favor new construction, renovating older office buildings, which used to be a surefire strategy to increase occupancy, is no longer paying off like it once did, according to an analysis by CoStar Group.
Only office buildings less than a decade old have been able to increase occupancy since 2020, the analysis said. New office construction is the only segment that has generated positive absorption, while buildings between three and 10 years old have managed to maintain most of their tenants and occupancy. But buildings older than that have experienced severe losses regardless of innovations, CoStar said.
This presents a dilemma for owners of older buildings who might consider a renovation to provide the fit, finish and amenities to compete for top-tier office tenants. The significant capital investment to do so does not guarantee success and CoStar's data suggest any rewards from doing so are likely to be temporary. In addition, return on investment may be diminished compared with what landlords once achieved on renovations, said CoStar.
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