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May 24, 2023

Conversions: From Office Space to “Whatever You Need”

By Mike Ogasapian We have now entered a period of palpable unease and

By Mike Ogasapian

We have now entered a period of palpable unease and uncertainty in the office market in Greater Boston and worldwide. New research recently claimed that about 1.4 billion square feet of office space will be obsolete by 2030. In urban areas, some cities have considered re-zoning to allow for residential conversion, but the ability to convert is limited since the large square floor plates create long narrow units with very little window line. This has owners, lenders, and local municipalities all wondering the same thing: what do we do with all this empty space?

To watch a video interview on conversions, please click here, or on the image below.

To understand where the office market is headed, we should first analyze what dynamics have led to the current oversupply here in Greater Boston. Inside I-495 today, Boston's office supply totals roughly 110 million square feet, and of that, about one-third was built after 1995. The Savings and Loan Crisis of the early 1990s gave way to an unprecedented office demand during the Dot Com Era and caused much of the oversupply we see today.

Ironically, the internet has been the driver of oversupply on both ends of the cycle, fueling the high demand that led to overbuilding during the Dot Com Era and now the leading cause of the lack of demand thanks to the advent of Zoom and Microsoft Teams. Now, digitally enabled workers can operate just about anywhere, and the trend of remote and hybrid work has caused office users to downsize and opt for smaller footprints and shorter-term leases. The internet giveth, the internet taketh away.

Greater Boston's office developers and landlords have known this since before the pandemic, as suburban office occupancy has historically been between 83-85% over the last three decades. The work-from-home model simply accelerated the trend for office's largest users: technology companies. The lasting impact will require much of the existing inventory to be repositioned into something else entirely.

Converting office buildings into lab space has been a growing trend. In the 128 Central submarket alone, over 12.8 million square feet of existing office space has been converted into lab since 2018 (Source: R.W.Holmes). Office buildings built for tech companies in the 90s and early 2000s typically required ample power for server rooms, loading docks to send out software that perhaps needed to go out via physical disks, and deck to deck spacing to allow for airflow in open office areas that were once packed with workers cubicles—all these attributes provided infrastructure that can now be utilized to deliver lab ready space.

Large-scale lab conversion has been gaining notoriety for quite a while now, with lease deals over 20,000 SF happening at a rapid clip until late 2022. That appears to have slowed for now due to uncertainty in the capital markets, but there is still high demand in the 5,000 to 15,000 SF range for lab users on a lighter scale. This smaller scale conversion has become another viable option for office owners. Several deals have happened in 2023 in this size range so far, including Blue Martin Labs converting a former State Department of Revenue office into a blood and tissue culture lab at 100 Trade Center in Woburn and Quantum Diamond converting a similar space into light lab space at 1466 Main Street in Waltham.

Alternatively, the demand for flex space for a variety of uses has been growing steadily over the last five years. Uses such as light manufacturing, non-lab research and development, light assembly, and clean warehousing (products such as medical devices) have had difficulty finding useful space in Greater Boston. Many office buildings can easily convert to this type of use, particularly because they are fully temperature controlled as opposed to much of the single-story flex market, which is just heated and not cooled.

Converting office space to flex use is straightforward if the building has ample power and loading access. In some cases, owners have opted to install a freight elevator or create more loading docks to attract users to upper floors and allow for subdivision. The largest cohort of tenants in this size range tends to range between 10,000 to 30,000 SF. Many Greater Boston office buildings have floorplates ranging between 50,000 to 60,000 SF. The users do not require nearly the amount of fit-out that lab users need, and the work typically entails delivering an open space with VCT tile and removing the ceiling grid in 60-80% of the space.

We’ve recently seen this trend play out with Gentex taking 12,000 SF at 320 Norwood Park South in Norwood, Meta Materials taking 13,000 SF and Worldwide Tech Services taking 14,000 SF at 85 Rangeway Road in Billerica, and Rewalk Robotics taking 12,000 SF at 200 Donald Lynch Blvd in Marlborough. We expect user demand for this type of office conversion to continue in Greater Boston as the existing single-story flex/manufacturing/R&D cannot satisfy demand.

The third trend we see now is simply scrapping the existing office building to make way for a new high bay industrial building (32’ + clear height) in its place. Along 495, Calare Properties scrapped 120,000 SF of 2-story office at 50 Nagog Park in Acton to make way for a 120,000 SF new construction industrial building in 2020. Also in 2020, Northbridge Partners took down nearly 100,000 SF of two-story office at 151 Taylor Street in Littleton to make way for a 160,000 SF industrial building fully leased to Amazon. DH Property Holdings recently received approvals to demolish a 2-story office building at 270 Billerica Road in Chelmsford to build about 100,000 SF of new high-bay industrial space.

As with the greater economy, we should remember that real estate is cyclical and that the trends playing out today in one asset class do not necessarily mean they will be the same in five, ten, or twenty years from today. Despite the current state of the office market, several large office users such as AT&T, JP Morgan, and Amazon have all mandated their employees to return to the office at least some days a week. But while there is some hope to see a day when office demand returns, a better future would be one where the oversupply is utilized differently and more efficiently.

(Mike Ogasapian is a Vice President at Wayland, MA-based commercial real estate brokerage firm R. W. Holmes.)