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Converting Office to Industrial Space is Picking Up Steam

One of the growing trends in commercial real estate is converting vacated office space into industrial use.

Since the onset of the pandemic, more employees have been working from home. While office vacancies in some markets are recovering, it's still nowhere close to 2019 levels.

Of course, CRE developers have noticed that trend and are getting creative. During the year-to-date through August, a recent JLL report shows that 17.3 million square feet of office space has been converted into other property types in the country. And since the 1990s, that number has exceeded 150 million square feet.

Also, according to the data, multi-family has dominated the trend from 2021-2024, controlling 53 percent of project redevelopments and conversions. However, industrial is emerging, nearly doubling from just four percent during 2010-2019 to seven percent between 2021-2024.

"Industrial really has been, the star of all the different sectors coming out of Covid, especially in metropolises that are super high density, like South Florida,"  Brian Smith, executive managing director/SFL industrial lead of JLL, told GlobeSt.

"There was such a constraint on land, so there was a lot of pressure put on products. The result was rents skyrocketed, [and] pretty much doubled in two years. So developers were forced to start to get creative and look for land anywhere they could."

One notable development is Bridge Industrial's Miami project, which will involve the demolition of the former office space headquarters of logistics company Ryder System. Once the project is completed, which is anticipated for the third quarter of 2025, it will feature two Class A industrial buildings that take up over 326,000 square feet.

Smith, who (along with his team) is focusing on leading the property's leasing efforts, spoke to some of the fundamentals that make the site a good bet to transform into industrial space.

"It's located within one of the top-performing industrial parks in the state, in Flagler station," he said.

He added, "Two, there [hasn't been] new product delivered in that park, in over five years. Three, the size of the site and the configuration and the way it lays out is very attractive for a developer."

Primarily, Smith focuses on South Florida. But it's not all just about office conversions, he is also noticing that developers are even at least entertaining the thought of transforming retail properties into industrial buildings. But so far, in his market – he hasn't seen anyone pull the trigger. According to him, it might be because of the current landscape in South Florida, which has seen a growing population, coupled with high density.

"We have seen people explore it, but nothing has taken [off] so far," Smith said of the retail-to-industrial conversion potential.

"It really almost depends, street by street and site by site, as to what could work in South Florida. It's a highly competitive market, and so developers are going to look at the highest and best use for all opportunities."

According to JLL, New York, Washington, D.C., and Boston respectively have been the top three markets since 2020 that have converted the most office inventory.

But will the trend of transforming office spaces continue? Or will that start to cool down? Smith's instinct tells him, we will "see more of it" – but he is still hesitant because of how difficult is it to make an industrial site work from the ideal location to the proximity of big infrastructure.

"I think key sites within good industrial sectors, especially within these large parks [are] at a good equilibrium in terms of the amount of product we have versus demand."

In two or three years from now, however, Smith warned that there could be a shortage of land for industrial projects. While that isn't the case right now, office conversion projects are worth paying attention to for CRE players, and whether the work-from-home trend prospers or dies down.

Reprinted with permission from the Tuesday, 10 September 2024 16:49:02 EST online edition of GlobeSt © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.