It’s no secret that the office sector continues to experience its share of challenges. The combination of higher vacancy rates, lower utilization and decreased financial viability is turning many of these properties into what the Boston Consulting Group (BCG) dubs “zombie” buildings. In a recent article entitled “Countering the Curse of Zombie Buildings,” BCG director Santiago Ferrer and colleagues noted that buildings become zombies when “vacancy rates and unused space under lease drive utilization to 50% or less.”
Ferrer stated that cities such as New York, San Francisco and Los Angeles will feel this impact more due to their high value real estate markets combined with a greater number tech jobs in those areas. According to BCG research average vacancy rates are at 17%, while utilization has fallen to 42%. This decline is attributed largely by “at-risk” space; leases unlikely be renewed within three years making up 60% percent total office leases expiring soon. Additionally rising interest rate have made refinancing more expensive leading an estimated 40% decrease in building values from pre-pandemic levels over next 12 – 36 months resulting in potential defaults on loans taken out for these properties .
To mitigate against this potential zombie apocalypse Ferrer suggests owners must take action now either repositioning their property for new tenants or redevelop it entirely different use case while municipalities should lend support through bringing workers back downtown , supporting developers who wish repurpose existing structures , ensuring safe clean spaces . He also pointed out some cities like New York have already formed task forces dedicated revitalizing downtown areas but if nothing done further erosion CRE office building value expected occur .
