Small Minds Breed Small Ideas: Tackling Challenges in the Office Sector

Small Minds Breed Small Ideas: Tackling Challenges in the Office Sector


Newsletter – May 2023

In Q1 of 2023, the Office sector has continued to struggle. Vacancy rates are high, shadow vacancy is speculated to be significant, and looming loan maturities threaten to stress the office product type even further. It is important to understand the challenges facing the office market in the coming year to better understand what kind of creativity will be required to continue building wealth in this difficult economy.

Bloomberg estimates that $92 Billion of Office mortgages will come to maturity in 2023. This means that Office owners will either have to sell their building to offload their underperforming asset, or they will need to refinance. All else held equal, a simple refinance at a time like this will turn the owners upside down in their investments the day they sign the new loans. However, if owners decide not to sell, they may consider repurposing some of their square footage to retail or multifamily to offset the challenging vacancy numbers and higher interest rates.

With investors selling assets out of necessity, the question must be asked, who will buy these buildings? Vacancy is at 14.2%, but shadow vacancy is much higher. Tenants who have 30,000 SF of space might only have 5 employees coming to the office everyday. These underutilized spaces signal disaster for the Landlords when leases expire and tenants who want to resign take a quarter of the space they currently occupy. Think of shadow vacancy as impending vacancy. For short term tenants, these vacancies will be realized soon. However, Landlords may discover their longer term tenants wish to renegotiate their lease terms, using the threat of default as their negotiation leg to stand on.
Another factor in the demise of the office sector is the number of SF under construction compared to demolitions. In 2023, Net deliveries are roughly -985,000 SF. This means that almost 100K SF more Office space has been demolished than has been delivered. And while net absorption was high in Q1 2023, the expectation for the end of the year proves difficult with predictions estimating a negative net absorption of almost 5 million SF.

Net Absorption

As Office continues to struggle, developers are seeing fewer and fewer opportunities in the product type and tenants are fleeing the high rates set by landlords. The trend for new office development is in steep decline and with vacant buildings becoming the new norm, Office has a challenging road ahead.

Office defaults are expected to increase in 2023. Vacancy rates are increasing, and they don’t factor in the shadow vacancy. Landlords and investors need to devise a plan to extricate themselves from the office sector in 2023 or get creative with how they utilize their assets to produce the best return. Repurposing buildings to retail and multifamily may become the norm. Regardless, creativity will be required to turn office buildings into high performing assets in this post-pandemic environment. While the forecast looks bleak, Office will never be decimated. Small minds breed small ideas, and in the words of Albert Einstein, “If you always do what you always did, then you will always get what you always got.” Stay creative, and devise ways for your assets to work for you!

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Confidentiality Agreement

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NavPoint Real Estate Group (“Broker“) has been retained as the exclusive Broker regarding the sale of the property located at the address noted below.

To receive an Offering Memorandum (“Offering Memorandum“) please read this Confidentiality Agreement and agree to the terms. The details and information contained within the Offering Memorandum were obtained from sources deemed to be reliable. Verification of the information contained within the Offering Memorandum are the sole responsibility of the Potential Purchaser. No representation is made to the accuracy of the information by Seller or Broker. THIS AGREEMENT is made and entered into by and between NavPoint Real Estate Group and “Potential Purchaser” and shall become effective when executed by Potential Purchaser or Potential Purchasers Broker.

A. Commencing with discussions held between their respective representatives the parties have pursued and expect to continue to pursue discussions (the Discussions) relating to the potential sale of:

In the course of these discussions, Seller has disclosed to Potential Purchaser and may continue to disclose to Potential Purchaser certain information of proprietary and confidential nature (“Confidential Information”).

B. Seller will provide to Potential Purchaser certain printed, typed and handwritten materials and other tangible materials containing or relating to Confidential Information (“Documentation”).

In order to protect the Confidential Information, both during the term of the Discussions and after their expiration or termination, Potential Purchaser agrees as follows:

  1. Potential Purchaser shall maintain the Confidential Information in strictest confidence and shall not disclose to any third party any Confidential Information received from the other party. In addition, Potential Purchaser shall ensure that its officers, employees and agents likewise maintain the Seller’s Confidential Information in strictest confidence and that such persons do not disclose such Confidential Information to any other party. Potential Purchaser shall not have the right to use, duplicate, reproduce, copy, distribute or disseminate Confidential Information except for purpose of the discussions and negotiations as needed.
  2. Potential Purchaser agrees to limit access to Confidential Information received from the Seller to its own officers and employees on the absolute need-to-know basis solely for the purpose of the Discussions, and to use the same degree of care in reserving the secrecy of the Confidential Information furnished by the Seller and/or Broker as it uses in preserving the secrecy of its own Confidential Information.
  3. Notwithstanding the conclusion or termination of the Discussions, Potential Purchaser shall continue to fulfill its obligations hereunder for a period of one (1) year from the date of disclosure. Upon termination of the Discussions, all Confidential Information, including all forms of Documentation shall be returned to the Broker, including any copies or adaptations made by the receiving party.
  4. The obligation of Potential Purchaser under Paragraphs 1 and 2 above shall not apply or shall cease to apply to any information which Potential Purchaser can demonstrate by reasonable documentary proof- (a) to have been in the possession of Potential Purchaser at the time it was first disclosed by the Seller and/or Broker; (b) was in the public domain at the time it was disclosed to Potential Purchaser; (c) entered the public domain through sources independent of Potential Purchaser and through no fault of Potential Purchaser; (d) was lawfully obtained by Potential Purchaser from a third party who is free to disclose such information to Potential Purchaser; (e) to have been at any time developed by Potential Purchaser independently of any disclosure from the Seller; or (f) has been in the possession of Potential Purchaser for more than five (5) years.
  5. Potential Purchaser shall not have any right to register any copyright, trademark, service mark or corporate name based upon Confidential Information or otherwise register or claim any right to use any Confidential Information disclosed to it by the Seller without the express written consent of Seller and Broker. Nothing herein, and no disclosure of Confidential Information or Documentation pursuant hereto, shall be deemed a grant to Potential Purchaser, whether by implication, estoppels or otherwise, of any right or license under any industrial property right of the Seller.
  6. The Discussions shall continue until the date on which an Agreement shall have been concluded or the date on which either party shall have given written notice to the other of termination of the Discussions. All obligations of the parties hereunder shall survive any termination of the Discussions.
  7. Each party acknowledges and agrees that the unauthorized disclosure or use of Confidential Information disclosed to it by the other party or any other breach of its obligations will result in irreparable injury to the party, which furnished the Confidential Information. Therefore, each party agrees that the injured party shall be entitled to receive injunctive relief in any legal proceeding instituted by such injured party.
  8. This Agreement shall be governed by, and interpreted and construed in accordance with, the laws of the State of Colorado, USA.

For purposes of creating a binding contract in determining the rights and obligations under such contract in any court of law, the parties acknowledge that a signature reproduced by either digital signature, electronic signature, facsimile or photocopy shall have the same force and effect as an original signature and that the original and any such copies shall be deemed one and the same document. In the event this Non-Disclosure Agreement is submitted electronically, this agreement is provided under the Uniform Electronic Transactions Act – Col. Rev. Stat. §§ 24-71.3-101 et seq. By submitting this agreement, you are confirming your agreement to submit this Non-Disclosure Agreement electronically, and your indication of agreement, along with information provided, will have the same force and affect as if this agreement was submitted manually and your manual signature was provided. You should retain a copy of this agreement for your records.

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