The first real estate sectors to slump in a bear market are retail and office spaces. As we all know, offices are taking a major hit right now. Go into any large office building in any major city and make a note of all the empty spaces you see. Whether you’re visiting Florida, Pennsylvania, Southern California or Texas, this trend is more or less the same.

Nowhere is the office-space crisis felt more profoundly than in New York City. Edward Glaeser, chairman of Harvard University’s economics department, and Carlo Ratti, the director of MIT’s Senseable City Lab, recently reported that there is nearly 75 million square feet of vacant office space in the Big Apple alone. That’s enough space to fill more than 26 Empire State Buildings.

Repurposed offices

New York isn’t alone. Chicago is estimated to have nearly 60 million square feet of vacant office space, while Los Angeles has another 44 million square feet. This trend appears to be set to continue through the end of this year, making now a good time for interested parties to make low-ball offers on office buildings while continuing to monitor the market closely.

The end of 2023 could prove to be a good time to look at office property investments, so brokers should watch how this sector shifts. For instance, good deals might appear for buildings that go into foreclosure, but caution is appropriate given the current headwinds.

It appears that repurposing may be required to redeem some of these vacant properties. Therefore, mortgage brokers and their investor clients should approach these deals with a plan to add value by finding different, innovative uses for obsolete office space. One idea is to create virtual work pods or coworking spaces with amenities for remote workers.

Repurposing, however, can raise daunting challenges. For one thing, it can be expensive. For another, the many localized permitting processes have made it increasingly complicated to rezone a property for other purposes. Those who undertake a repurposing project need to make sure the zoning is correct for their needs. Otherwise, they need to be confident that they can get the property rezoned.

Some real estate observers have suggested that empty office buildings can be converted into residential units, pointing to the high demand for housing. Unfortunately, zoning regulations may be a hindrance and some of these properties can’t be converted due to underlying architectural issues. Other spaces would be so costly to convert that it wouldn’t make economic sense. As Moody Analytics recently concluded, “The office-to-apartment conversion trend will likely be a minor one, unless office values and rents see some major, permanent decline after the pandemic.”

Housing opportunities

Investors who tackle projects of this nature need to make sure they find people with the right experience who can do a deep, detailed cost analysis and suggest changes that are likely to be lucrative. Not many people have this kind of background. It would also be wise to have plenty of capital on hand. While each project is unique, investors should prepare for a repurposing process to take an estimated one to two years.

According to Zillow, July 2023 rents for all types of housing were 3.6% higher than one year earlier — and it appears that prices will continue to climb. As apartments increase in value, so do their tax assessments, and landlords tend to pass these and other expenses on to their tenants. Plus, the number of available units remains below market demand in many places, while rising mortgage rates have pushed homeownership out of reach for many renters.

For these and other reasons, apartment buildings will continue to be attractive to investors, and they’ll remain a good option for those seeking strong and stable cash flows. In addition, we may see more people look to economize by moving into smaller, less expensive units and by putting things into self-storage units. This is why new construction of self-storage facilities can be a good investment in the near term.

Indeed, new construction of housing, in general, gives investors the ability to make larger returns. This is because tax incentives can help support new construction. Buyers may be able to get their property’s valuation raised after construction, thereby increasing their equity almost instantly.

Farmland option

Mortgage brokers should also be discussing farmland investments with their clients. The nation’s farms offer a promising revenue stream.

The U.S. Department of Agriculture (USDA) reported that the average price per acre for cropland jumped by 14.3% from 2021 to 2022. Average prices in Kansas and Nebraska rose by more than 20%. These price gains are due to numerous factors, including a worldwide food shortage, robust crop prices, inflation and historic government subsidies stemming from the pandemic.

Farmland is an effective hedge against inflation since food prices climb rapidly in times of accelerated inflation. Many investors also believe that commodities will continue to increase in value. The USDA predicts that 2023 food prices will rise at rates above their long-term average.

Acquiring land and vertically integrating within a farm — in other words, owning the farm’s production process and output — presents a valuable opportunity. While it’s impossible to know for sure, some observers believe that the price of farmland will continue to climb through at least 2024.

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Commercial real estate is a constantly changing industry. Investing successfully in such an evolving environment requires constant analysis and frequent adjustments. It also means it’s important to be careful about who you trust.

Mortgage brokers need to direct clients to investments that promise a steady flow of returns regardless of market conditions. A true operator is one who buys under or off market, is always scrutinizing the deal and has a strong flow of potential deals coming in all the time. Whether or not they buy into these deals is based on market conditions.

Projecting two, three, four or even five years into the future is all but impossible. After all, who could’ve predicted the COVID-19 pandemic? What’s easy to see, however, is that buyers need to focus on the right properties in the right locations at below-market prices, in good times or bad. By doing so, anything a client acquires now is likely to grow in value in the future. ●

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