Is Office-To-Industrial Part Of The Obsolete-Office Solution? One City Is About To Find Out

An unlikely contender in the uphill battle to purge Dallas-Fort Worth of obsolete office space has entered the ring.

A handful of industrial conversions have kicked off in the Metroplex, endeavors that remove defunct office space from property tax rolls while addressing the shortage of land for warehouses and distribution centers, particularly in dense, urban submarkets. 

The vast divide between pricing on office and industrial assets has historically prevented these types of projects from penciling. But as the delta narrows, that dynamic has changed, unlocking new opportunities that could solve two problems in one fell swoop.

“In some cases, your industrial rents are as high as the office rents are currently,” said Colby Everett, director of development and acquisitions at Lovett Industrial. “It’s a new phenomenon in these markets, and I think there’s going to be more of it.”

DFW’s infill portfolio is attractive to developers looking to support last-mile logistics. But as available sites become harder to find, redevelopment opportunities are growing in popularity. Still, identifying properties suited for office-to-industrial conversions is a complex equation that depends on a number of factors.

Roughly 24 DFW empty office properties comprising 3.4M SF, or about 1% of existing inventory, are good candidates based on vacancy rate, location and age, according to a Partners Real Estate analysis provided to Bisnow. But those numbers could swiftly rise as office owners with maturing debt and expiring leases look for profitable ways to offload buildings.

“Office owners are starting to think about it as an exit strategy,” said Jim Traynor, managing director of development and investments at Foundry Commercial. “They might be positioning their buildings to sell for an alternative use, whether it be industrial or multifamily.”

More than 20% of the 1,700 U.S. office assets that sold in the first two months of the year traded at a price lower than their previous sales, according to a February report from CommercialEdge. Meanwhile, industrial prices notched a 4.3% annualized growth rate at the end of last year, per MSCI Real Assets.

“It is not uncommon for these older [office] properties to sit idle, or completely empty, for years,” said Steve Triolet, senior vice president of research and market forecasting at Partners. “That is one of the reasons why we have seen a number of initiatives to either convert the properties to other uses … or to tear the property down and do something else with the land.”

Prologis is redeveloping a 64-acre office and research campus in Plano into an eight-building industrial park. Lovett Industrial and Rosewood Property Co. just finalized a construction loan for a project that will convert a former call center in Addison into a 141K SF warehouse.

The trend has also gained momentum nationally. Office inventory earmarked for a conversion to industrial totaled slightly more than 15M SF in early 2023, a 34% increase over 2021, said Liz Berthelette, head of northeast research and national life science research at Newmark.

“It has a lot to do with what I’m calling the ‘office to anything’ play,” she said. “We’re seeing a lot of functional obsolescence or underperforming office assets, and for the last few years there’s been a huge push for adaptive reuse for a number of asset types.” 

Kearny Real Estate Co. is in the process of razing an office complex in Santa Ana, California, in favor of an Amazon-style distribution center. In suburban Chicago, Brennan Investment Group has planned a $100M project to replace a 485K SF distressed office building with a Class-A logistics campus.

When feasible, conversions are favorable to ground-up development because they are cheaper and quicker to execute, Everett said. The Addison site was an ideal candidate because of its concrete tilt-wall panels and 31-foot clear heights, but straight conversion opportunities are fairly uncommon.

“You have to check a lot of boxes. It really has to be the right location, and you’ve got to have good access,” Everett said. “It’s a rifle-shot approach, you have to be thoughtful and nuanced.”

Even if the building and site are good fits physically, developers are often met with fervent pushback from nearby residents whose concerns range from truck traffic to pollution.

In the Chicago suburb of Deerfield, Bridge Industrial withdrew its plan for a $100M conversion after concerned residents derailed the project. A year later, the local board of trustees passed a ban that prohibits the development of logistics and fulfillment centers. 

“The zoning piece of this puzzle has become more complicated,” Berthelette said. “There is community pushback in a number of places.”

Local opposition drives many developers to opt for the path of least resistance by pursuing projects in areas where rezoning is not required. That was the case for Foundry Commercial, which just wrapped up demolition on a 287K SF office building at 4000 Horizon Way in Irving to make way for a 337K SF Class-A industrial warehouse.

“If we were to go and look at a rezone opportunity, we’d want to know that it’s in a location where the city and community wants it,” Traynor said. “We wouldn't go into a situation where there’d be any pushback.”

Cities should work hand-in-hand with developers to generate the type of development that’s amenable to the community, CBRE Senior Vice President Fred Ragsdale said. Things like high-tech manufacturing or life sciences projects tend to garner more support than a traditional industrial use. 

“A lot of communities are a little stir crazy about having distribution centers around their housing,” he said. “When developers partner with the city … it creates an avenue for the city to really push for a certain type of user.” 

Higher-end industrial facilities also make better sense in dense, infill submarkets because they tend to be close to the caliber of labor those uses command, Ragsdale said.

“In a tertiary part of the market, attracting labor becomes very difficult, especially when you’re talking about professionals that might make $150K per year,” he said. 

Office-to-residential projects have long dominated the conversation around conversions, especially amid an urgent demand for housing in DFW. 

But industrial could steal the conversion crown as nearshoring, onshoring and e-commerce continues to boost demand for warehouses and logistics centers, Berthelette said.

“It’s basically a covered land play,” Berthelette said of office-to-industrial conversions. “It will still remain niche but continue to gain momentum as long as industrial fundamentals stay strong and we continue to see the growth and evolution of our domestic supply chain.” 

The trend will probably end up moving the needle more on office than industrial, Everett said. The infill sites developers are going for tend to be small, so while they probably won’t make a huge dent in increasing industrial inventory, they could be effective in chipping away defunct office space.

“It’s a trend that has some staying power,” he said. “From everyone in the office [space] I’ve talked to, they’re excited about it as another way to either pivot their business plan or exit.”