Dallas Cothrum, PhD, is president of Masterplan, a Milrose company, the largest planning and permitting firm in Texas. He is a member of Tyler Basketball Officials Hall of Fame and the Texas Association of Sports Officials Hall of Honor. He is a Contributing Columnist to The Dallas Morning News.

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Tom Metcalfe is a leader and innovator in Dallas-Fort Worth commercial real estate. With 44 years of experience under his belt, his market expertise and insights on demand, development and financing bring clients immense value.

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Kevin Wallace is an architect by training and a problem-solver by craft. He is known for bringing passion projects to life as a multifaceted planning, architectural, and development advisor with 30-plus years of experience.

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The mass adoption of remote and hybrid work since 2020 has led to weak demand for commercial office space, but not only in urban cores and central business districts (CBD). Office buildings in suburban areas and halo cities are reporting alarming vacancy rates, which could lead to loan defaults, foreclosures, and eroding property values. And from a commercial real estate perspective, market demand for these properties in their current designated use state is not expected to increase. Obviously, this is a problem financially for both owners and operators as well as the cities where these buildings are located.

So, how did we get here, and why are there so many properties that are underperforming?

While the majority of midsize and grocery-anchored strip-mall retail has rebounded since the pandemic – 5,000 square-foot spaces are now at 96% leased – the commercial office category will not reflect that same level of rebound.

In a Dallas Morning News article, Steve Brown notes that more than 70 million square feet of office space is vacant in Dallas-Fort Worth, including sublease space – the largest amount of vacancies in decades. Only 33% of direct space on the market is in blocks over 100,000 square feet, demonstrating how many large companies have shed space since the pandemic in light of remote and hybrid work. This means the majority of vacant office space is in small and midsize buildings, many located outside the CBD.

We’re looking at suburban commercial office properties that are 50,000-250,000 square feet with 50% vacancy. These 2-3 story buildings with a dozen acres of surface park were built decades ago on the suburban edges of density to attract and establish new companies in the area. Dotting the suburbs with these 200,000 square-foot office buildings gave companies space to office in areas convenient to schools, homes, and areas people wanted to live. Now those cities have grown and expanded far beyond these building locations, such as Richardson, Plano, South Dallas, Garland, Carrollton, and more.

In the 1980s, there was a cavalier building boom in the suburbs and developers were willing to throw anything up and see if it worked in attracting businesses and people. These young suburban areas with new office buildings close to schools, amenities, and single-family housing were attractive to companies relocating to the area. They could more easily attract the labor force that was there at that time.

But now there’s little reason to return to these older inefficient buildings, especially as many companies that formerly occupied these spaces have decided to save money by going fully remote. What type of company wants to repurpose the building when so much work likely needs to go into it?

Cities are beginning to look at ways to convert these vacant and mostly vacant buildings, increase occupancy, and improve efficiency. If there is no demand for office space in these areas, what building types ARE in demand? One large office space at Legacy Drive in Plano, the former Electronic Data Systems headquarters, is planned for a conversion into a life science and medical research center.

Taking a closer look at properties that are underperforming, we can build off of the quality things that exist around it to regenerate the area. By removing excess office space and replacing it with mixed-use, we’re helping cities to reinvest in communities by supplying the property types most in demand, like housing and small retail.

From a broker’s perspective, in evaluating these vacant properties, they’re not as desirable for the same purpose anymore. In fact, certain cities and properties are in dire need of revitalization because the area itself is desirable or up and coming. It’s a great spot, affordable and convenient for Millennials who really love the quality of life they find there.

What makes these properties primed for rethinking is they have all the right things going for them – a location near existing density, lifestyle amenities, major employers and neighborhoods where people want to live. Often, there hasn’t been vacant land in these areas for decades. We’re providing suburban infill solutions by taking one kind of square footage off market and creating demand for the remaining buildings. By removing competitive office space and taking 300,000 square feet off the market, all those other buildings around it that need occupants can be filled with workers. 

A report from the National Bureau of Economic Research [link to report online] makes the case for incentivizing the conversion of “brown office buildings class B/C” to green apartments that preserve asset value and create mixed-use and residential housing to address a number of issues that result from the “urban doom loop” as the authors call it. Rehabilitating existing buildings not only addresses the misallocation of space in suburban areas, it produces up to 50-70% fewer carbon emissions than new construction.

We’re prepared to take a macro look at each city individually, identify underperforming buildings, and create a plan for redevelopment. Where can we increase existing office occupancy as well as housing where amenities and demand are already in place? Our goal is to help cities regenerate communities with considerations for energy efficiency, density, purpose and upzoning for a proper mix of property types.

When pressure is applied to these cities to do something with the glut of office space, we begin to see more municipality-led measures to shrink that inventory, such as incentives to make it easier to convert or redevelop an office building, or recognizing that the land underneath these outdated office buildings is more valuable in a land-constrained market to demolish the building in favor of constructing a new project.

We help identify buildings suitable for conversion, redevelopment or upzoning, evaluate the property and site, and together create a proforma that makes the highest and best use of the site.

Tom Metcalfe is a leader and innovator in Dallas-Fort Worth commercial real estate. With 44 years of experience under his belt, his market expertise and insights on demand, development and financing bring clients immense value.

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The death of the office may be a win for sweatpants, but the state of office buildings as a real estate asset is no joking matter. Some experts are predicting a 40% decline in value and it will continue year over year.

The fallout from the retail meltdown during the Great Recession provides valuable insights and warnings to office building operators and owners.

The iPhone revolution of 2007 compares favorably to the letterpress of Johannes Gutenberg. Steve Jobs and Gutenberg share a peculiar devotion to the turtleneck and a profound intersection between technology and the humanities. By wedding technology with the arts, these visionaries created transformative devices before customers even knew they desired them.

Retailers and property owners failed to catch the iPhone wave in 2007. They were then wiped out by the storms of the Great Recession. But the signs of disaster were there long before the iPhone. Retail had changed dramatically.

In 1995, online book seller, Amazon, and eBay had been making steady progress in online sales. Zappos, StubHub, and PayPal, now household names, were also, pun intended, making waves by the end of the century. In 2000, Walmart started its online service just as it had become the number one retailer in the country by finally overtaking Sears.

Venerable giant Sears survived more than a hundred years and the Spanish flu, two World Wars, the Great Depression and the rise of suburban America. It failed to survive the iPhone revolution and now has only 12 stores remaining in 2023. The company that always found the right wave and created Allstate Insurance and Discover card failed to change.

Waiting for change in real estate is a dangerous practice. It allows first movers to strike, gaining significant brand advantage and customer loyalty.

“I put a dollar in a change machine,” George Carlin once quipped. “Nothing changed.”

Retail has now recovered since the global pandemic, posting occupancies in the high 90 percent range in Texas. Why? Because it has changed. Auto repair uses are now in retail centers; self-storage is a retail use; child related lessons, tutoring, and services have occupied empty spaces. The secret to the renaissance of retail has been in no longer overbuilding and making significant changes to operations and expectations.

People are realizing much more quickly how much the office has changed. Hopefully, some have learned lessons from the painful flameout of retail following the Great Recession.

The suburban markets across Texas and especially the Dallas-Fort Worth Metroplex were successful in the 1980s in waging a prolonged war against the urban core. Business shifted from proper downtowns just as residents fled urban public school whether from substandard education or culture wars. Upscale suburban communities dot the Metroplex and went from towns to cities.

Businesses addressed the desires of their employees by making their commute easier. Today, employees, especially younger ones, want their commute to be from their coffee pot to the desk.

There’s a place for office, but it’s not every day. Businesses are taking less and less space, slashing their costs and providing flex schedules to lure and retain employees.

Cities must change. Suburban office buildings risk being Blockbuster stores in a streaming age. The significant tax base provided by the office buildings is already slipping away. The sands are quickly running through the hourglass, and the cities that respond fastest to this change will prosper.

The CRE-NEXT team can act quickly to determine the best new use and work with cities to make that change happen. Our combined skills of brokerage, architecture, and zoning, permit expediting, and economic incentives allows for weaving together an intradisciplinary solution for distressed assets.

The signs of office demise were there before the pandemic. Real estate experts had worried about the future of office space well before the pandemic. As far back as 1989 Peter Drucker wrote, “Commuting to office work is obsolete.” The events of 2020, with the pandemic and Great Resignation, have accelerated the cycle.

In an effort to cut costs during the Great Recession, companies decreased footprint and went to an open space model with more employees per square foot. They also started to allow some employees to work from home. The trend was already in place.

Meanwhile, in the retail market, there was a significant pairing. Often initiated by municipalities, the policy, combined with few new builds, has made all the difference. Further, many retail buildings have been converted to other uses successfully.

Waiting is unlikely to yield strong results. All the precincts have counted their votes and it’s not looking good for office. A recent report from Research for Capital Economics predicts that office values will not return to pre-Covid levels until 2040. That’s a long time to wait on the sidelines.

Recently, the notion of first movers winning the market and gaining the greatest brand awareness, customer loyalty, and profit share has been challenged. Second movers have gained favor due to the setbacks of first movers like TiVo, Redbox, and Yahoo. These companies, once dominant, have been pushed aside by streaming services, Netflix, and Google.

Real estate, however, will still favor first movers. Office conversions are prudent. Those who act first will receive support from elected officials and find lenders more willing to listen. They will also have the opportunity to select the best sites.

Planning is about change over time. Zoning cases are about change right now to meet the market. Throughout my career, the only constant I have learned is that change should happen somewhere else.  This vague location does not work well in the real world of real estate. Garnering support and understanding of municipal government will be required.

The CRE-NEXT team of professionals have significant experience navigating significant real estate tumult, resulting in positive change of stranded assets. We can fix your problem by creating change. Waiting is not an answer. Owners of broken retail assets sold their properties at steep discounts, only to allow others to make the profit.

Having trusted, experienced guides to navigate the technical aspects of redevelopment, zoning, permitting, economic incentives, and understanding the market is necessary.

The waves of change are going to continue. It’s best you find someone who knows how to surf and help you find the right wave.

Dallas Cothrum, PhD, is president of Masterplan, a Milrose company, the largest planning and permitting firm in Texas. He is a member of Tyler Basketball Officials Hall of Fame and the Texas Association of Sports Officials Hall of Honor. He is a Contributing Columnist to The Dallas Morning News.

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As of Fall 2023, this is where we are in the market: 53 million square-feet of vacant office space exists across the Dallas-Fort Worth metroplex in buildings no more than 250,000 square feet in size. The majority of these buildings are suburban and 100% vacant. With the North Texas population forecasted to continue growing, the demand has shifted from commercial office developments to mixed-use and residential. There are an exponential number of properties ripe for redevelopment or conversion to meet this demand and increase the real estate value.

Suburban Texas cities are experiencing the lion’s share of growing commercial office vacancies, particularly in the Class B+ and below office buildings located in suburban office parks. Yet there are features of the communities, neighborhoods and buildings we find in these office parks that give us hope that we can renew communities, foster deeper neighborhood links, and find new life for these office park buildings and sites. It begins with the identification of which suburban communities are desirable locations for the tenants we hope to attract.

The tenant profile for the Central Business District (CBD) markets is very different from the suburban 18-hour cities – which are the halo or first-ring cities around the dense urban core. The Urban Land institute defines the “18-hour” city as a small or mid-sized city with above-average urban population growth, a low cost of living, and a low cost of doing business. These suburbs attract a tenant demographic of 25-35 years old, primarily Millennial and Gen Z young professionals looking for the village concept, which defines the 18-hour city. There’s an appealing quality of life that exists in these areas where people can live close to entertainment, grocery and retail, schools, restaurants, parks and outdoor amenities, curated events and services – and work.

The tenant profile for these suburban areas is a value-based demographic and helps demonstrate why these suburban office parks have the potential to be attractive as conversions to multifamily and mixed-use. Property owners are receiving up to 20% greater return than the market rate for garden-style communities in these areas. Tenants are happy to pay the premium on their housing to have access to a denser, higher quality of life “urban village” where they can reduce transportation costs and travel times.

Tenants are looking for authenticity, sustainability and a community that reflects their values and lifestyle. For example, look at Dallas-Fort Worth area cities with strong identities and social activities like Frisco, Grapevine, and McKinney. They have the active village concept that Millennials are looking for as a component of their lifestyle and community. The natural setting is also becoming a priority, where everyone in the community has access to nature and outdoor activities.

So how do we approach these vacant and mostly vacant aging commercial office buildings in these communities – buildings that are taking up valuable real estate but don’t serve a purpose that the community wants or needs? We need to assess the community, the site and the building to determine the ease of upzoning, compatibility of the neighborhood with mixed-use and ease of converting the existing structure to a mixed-use community. And finally, it has to pencil.

We consider zoning, permits and municipality-offered incentives for redevelopment to assess what will allow the most efficient conversion of the site and building. What can we do with the existing building while minimizing construction costs and getting the highest and best use from the property and investment?

We evaluate the site, the building, the walkability score and transit availability, and even potential views from the building itself. In the site assessment phase of these existing buildings, we are closely evaluating the building itself: based on the building form, what does each floor plate look like, and what is the window-to-core distance to allow the most efficient conversion of that plate to repetitive units?

Additionally, we consider other attributes of the building to determine the feasibility of a conversion, such as building geometry or shape, the number and locations of elevators and stair towers and whether those need to be relocated, the structural grid and column spacing to allow for optimal repeating unit plans while improving access to outside air and natural light. When converting from commercial to multifamily, adjacent or covered parking may need to be added so tenants can step from their car into the front door and minimize their exposure to the elements.

Equally important to consider is the mechanical system and whether it can be converted to unit types as opposed to zone loads, as well as electrical, plumbing and HVAC systems. Often C-PACE financing can offset the cost of the mechanical, electrical and water use redevelopment, and making the building more energy- and water-use efficient.

The benefit is not only for the developer and owner; there is significant financial benefit for the city to transform a non-performing asset into a high-performing one. The higher density can increase the number of jobs, expand the tax base, and amp up retail sales and local spending, all of which goes back into the community, fueling the vibrancy and viability of the local neighborhood village.

Whether choosing building conversion or scraping the site and redeveloping it, an experienced development advisory team that understands the path to a successful project is vital.

Kevin Wallace is an architect by training and a problem-solver by craft. He is known for bringing passion projects to life as a multifaceted planning, architectural, and development advisor with 30-plus years of experience.

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