Newmark Group Inc.

11/29/2021 | News release | Distributed by Public on 11/30/2021 08:07

Space to Replace: Divergent Market Fundamentals Drive Office-to-Industrial Conversions

Space to Replace: Divergent Market Fundamentals Drive Office-to-Industrial Conversions

While the industrial market has soared, the office market has softened, driving the conversion of some office product amid shifting demand. This report explores which markets are experiencing office space redevelopment and how much, and details the considerations for investors and developers exploring office-to-industrial conversion opportunities.

Contact Us
Country Afghanistan Aland Islands Albania Algeria American Samoa Andorra Angola Anguilla Antarctica Antigua and Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bonaire, Saint Eustatius and Saba Bosnia and Herzegovina Botswana Bouvet Island Brazil British Indian Ocean Territory British Virgin Islands Brunei Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile China Christmas Island Cocos Islands Colombia Comoros Cook Islands Costa Rica Croatia Cuba Curacao Cyprus Czech Republic Democratic Republic of the Congo Denmark Djibouti Dominica Dominican Republic East Timor Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands Faroe Islands Fiji Finland France French Guiana French Polynesia French Southern Territories Gabon Gambia Georgia Germany Ghana Gibraltar Greece Greenland Grenada Guadeloupe Guam Guatemala Guernsey Guinea Guinea-Bissau Guyana Haiti Heard Island and McDonald Islands Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Isle of Man Israel Italy Ivory Coast Jamaica Japan Jersey Jordan Kazakhstan Kenya Kiribati Kosovo Kuwait Kyrgyzstan Laos Latvia Lebanon Lesotho Liberia Libya Liechtenstein Lithuania Luxembourg Macao Macedonia Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Martinique Mauritania Mauritius Mayotte Mexico Micronesia Moldova Monaco Mongolia Montenegro Montserrat Morocco Mozambique Myanmar Namibia Nauru Nepal Netherlands New Caledonia New Zealand Nicaragua Niger Nigeria Niue Norfolk Island North Korea Northern Mariana Islands Norway Oman Pakistan Palau Palestinian Territory Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Poland Portugal Puerto Rico Qatar Republic of the Congo Reunion Romania Russia Rwanda Saint Barthelemy Saint Helena Saint Kitts and Nevis Saint Lucia Saint Martin Saint Pierre and Miquelon Saint Vincent and the Grenadines Samoa San Marino Sao Tome and Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Sint Maarten Slovakia Slovenia Solomon Islands Somalia South Africa South Georgia and the South Sandwich Islands South Korea South Sudan Spain Sri Lanka Sudan Suriname Svalbard and Jan Mayen Swaziland Sweden Switzerland Syria Taiwan Tajikistan Tanzania Thailand Togo Tokelau Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks and Caicos Islands Tuvalu U.S. Virgin Islands Uganda Ukraine United Arab Emirates United Kingdom United States United States Minor Outlying Islands Uruguay Uzbekistan Vanuatu Vatican Venezuela Vietnam Wallis and Futuna Western Sahara Yemen Zambia Zimbabwe
Email Address is required

I would like to receive the latest updates from Newmark

By submitting your data through this form, you confirm that you are above the age of 18, that you have read and understood the Privacy Policy, and that you agree to the collection, use and processing of your Personal Information by Newmark & Company Real Estate, Inc. in accordance with said policy.*
Thank you for sharing your information with Newmark!

Unprecedented levels of industrial demand across the U.S. have left tenants with a critical shortage of space options, reflected in an all-time low industrial vacancy rate of 4.6% as of the third quarter of 2021. Comparatively, the U.S. office market is contending with uncertainty in the post-COVID-19 world, and the pandemic has only accelerated obsolescence of some older, less-amenitized product. This divergence among asset classes is increasingly driving investors and developers to consider industrial redevelopment opportunities for some unproductive office properties. Since 2018, at least 45 office properties totaling 11.3 million square feet have been redeveloped or are in the process of redevelopment into industrial use. This observed activity is predominantly concentrated in markets where density and land constraints are driving forces resulting in perennially tight industrial vacancy. While office space generally costs significantly more to build than industrial and yields higher rents when occupied, the economics supporting industrial redevelopment in these regions are buoyed by exceptionally strong market fundamentals, particularly when compared to each metro's office market, where office vacancies are roughly 10 to 18 percentage points higher as of third-quarter 2021.

Office-to-industrial redevelopment is a complex scenario. Identifying potential conversion projects could prove invaluable for investors and developers looking to meet increased tenant demand for modern industrial space. Newmark's proprietary modelling and analysis indicates the most likely office candidates for industrial conversion are older suburban assets with an average land area of roughly 15 to 25 acres, located within four miles of a major highway. Layering in zoning considerations, existing land availability, industrial and office submarket fundamentals and other geographic attributes will also inform strategy, as not all obsolete office buildings present opportunity. Sites may face challenges including community opposition and zoning restrictions, increasing development costs, as well as challenges from competing uses; in particular, multi-family, healthcare and life science reuse. Near- and long-term outlooks for industrial demand are strong, and many supply-constrained markets are facing limited development opportunities. The office-to-industrial conversion trend, while niche, will continue to grow and will offer industrial tenants much-needed space while tightening existing office inventories by removing properties that are no longer competitive.

For More Information, Contact:

Elizabeth Berthelette
Director of Research, Boston
Lisa DeNight
Director, National Industrial Research
Nick Wood
Executive Vice President, Head of Industrial & Logistics ServicesMarket Leader, Salt Lake City Region