B and C Buildings Face Challenges and Opportunities

SAN FRANCISCO—A majority of US office buildings are either vacant or only partially occupied due to COVID-19. But in the months ahead, class-B and -C buildings face the biggest challenges.

This is because those buildings tend to be occupied by small businesses that are less likely to recover from the economic impact of the health crisis. But at the same time, owners of these buildings also have an unprecedented opportunity, says Mark Hefner, CEO and shareholder of MGO Realty Advisors, which is advising companies about how to quickly pivot during this challenging period.

“Healthy owners who have the capital and vision to adjust can transform their buildings into spaces that are most in demand right now, for example, warehouses for e-commerce companies,” Hefner says.

Hefner recently shared additional insights into the transformational shift already underway and what owners of B and C buildings should be thinking about right now.

GlobeSt.com: How should B and C tenants take advantage of the major concessions in the market right now?

Hefner: By using their occupancy and future cash flow to landlords as a powerful lever, tenants can potentially drive rents lower and/or mandate tenant improvement and building system upgrades so the building becomes a competitive alternative.

For owners, they can choose to invest and upgrade to compete; pivot and convert to an alternative use, e-commerce last mile as one relatively low-cost example; redevelop the site; lower rents to retain and attract tenants; or hand the keys back to the lender. Creative landlords may choose to attract or retain tenants by offering them ownership or options to purchase with today’s record low interest rates. Some companies that can forecast their real estate footprint at a location could benefit from ownership over leasing. A CPA could provide the relevant guidance on this but ownership could lower and fix major occupancy costs to a greater degree than the costs of leasing for some companies and users of real estate.

GlobeSt.com: How should these owners configure space when intended use doesn’t apply anymore?

Hefner: I recommend they pay attention to the market. What does the market truly need short and long term? Is it traditional class-B or -C office space, upgraded but cost-competitive healthy office space, e-commerce last mile shell space, community space, housing? The answer will vary submarket to submarket and building to building.

GlobeSt.com: What is the best way to put together a more flexible tenant mix to keep the building fully occupied?

Hefner:  Rents, amenities and location are the factors that usually drive the tenant mix. So, again, landlords need to talk to their existing tenants, understand the drivers of their submarket and talk to brokers and tenants alike to understand why tenants make certain building selections. With that data and a checkbook, landlords can make better decisions about what product to deliver to the market.

GlobeSt.com: What are some tips for installing healthy filtration systems and social distancing practices?

Hefner: An HVAC consultant and building engineer should be consulted for the best customized solution. Some of our clients are choosing to bring in portable HEPA air filtration systems as an interim solution ahead of major building system upgrades. While I cannot attest to the health benefits of such decisions and installations, these can instill more confidence in some employers and employees.