4 Ways to Improve Office Values

The office market faces significant challenges today. Many office properties—about 44 percent, according to the National Bureau of Economic Research—are underwater, with major tenants moving out or downsizing and long-vacant or distressed buildings struggling to attract new occupants or serious buyers. Yet demand persists for high-quality, well-located office spaces, and new or renovated properties are commanding higher rents as tenants seek better office experiences.

Owners and investors seeking to unlock and create value in credit-related assets and distressed properties can take certain steps over the next year or two, so when the market improves, they’ll be able to sell at a profit. Even well-performing Class A office buildings may need support from an experienced property and asset manager to compete with trophy buildings, secure high rents and maintain stable occupancy rates. Here are four of those moves.

1. Identify cost savings and revenue opportunities

While high interest rates, rising costs, and macroeconomic trends are beyond our control, managing expenses and revenue opportunities is within reach. A thorough review of management staff, janitorial services, landscaping, snow removal, engineering, tax appeals, concierge services, maintenance and utility management often reveals new ways to reduce expenses, directly benefiting the owner’s bottom line.

Income streams from conference centers, parking, on-site development and lease provisions also can be optimized. For instance, an experienced asset manager can help to identify ways to capitalize on an underutilized acre of land, guide the local permitting process, hire architects, engage contractors, and work with brokers and lawyers to maximize the property’s potential.

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2. Reinvest in the asset

When capital is limited, it’s crucial to focus on improvements that offer the highest return on investment. A partner with deep knowledge of local markets and tenant demands can help identify and implement the right improvements for the market without over-investing in the asset. For example, adding modern lobby furniture or cleaning up vacant spaces may help the building be competitive in its market and signals to brokers and tenants that the owner is committed to maintaining the property. Other properties may need smaller suites to attract today’s tenant, which tends to need less space, or a food service or specific social amenities.

Proactive market communication also is important. A visible and active team promoting the asset’s refreshed features, financial stability of ownership and good management helps prevent it from becoming a “zombie” property.

3. Engage with tenants

With hybrid work schedules remaining an option for many office workers, it’s vital to enhance the building experience to make the office “worth the commute.” Tailored social events, learning opportunities, wellness activities and volunteer programs can boost employee satisfaction, increase tenant engagement and improve retention rates. A robust tenant engagement program builds a community within a property and leads to higher tenant satisfaction levels than industry benchmarks.

4. Partnering for strategic operations

While it is not always clear to lenders or owners what to do to turn around a struggling office asset, an experienced operating partner can tailor solutions to enhance property efficiency, minimize costs and improve overall building quality. For example, we tap our expertise as a seasoned office owner to analyze and improve such metrics as budget and cash flow management, lender and debt compliance, ARGUS valuation and modeling, leasing and market analysis, capital improvements and disposition management.

In June 2023, Triangle Plaza, a 627,000-square-foot Class A office complex in Chicago’s O’Hare submarket, needed help with controlling expenses, and retaining and attracting new tenants. The four strategies listed above were implemented and, by June 2024, cost savings were realized through sharing staff and resources with a neighboring office property, renegotiating service contracts, reducing non-recoverable expenses, and conducting a CAM audit and reconciliation. A new 17,000-square-foot market-rate lease and 90,000 square feet of lease renewals were also completed, bringing occupancy to 95 percent. Tenant satisfaction also improved through onsite events and activities, coupled with enhanced communication via a mobile building app. Within one year, net operating income had increased by 10 percent.

Tactical thinking in today’s market

With office property values at historic lows, it’s best for owners and lenders who have reclaimed properties to hold onto cash-flowing assets for a year or two as interest rates and cap rates stabilize. Properties listed for sale now often linger on the market, creating uncertainty that deters tenants from committing. During this period, owners need to do more than just maintain the status quo; they need to build value. Partnering with an experienced operator, reinvesting in the asset, identifying cost savings and revenue opportunities, and actively engaging with tenants are all steps that can go a long way in generating revenue and driving property value until the time is right to sell.

Adam Parritz is director of Strategic Office Operator Services at Glenstar.

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