REPORT: Texas Office Renovations No Longer A Silver Bullet For Pushing Rental Rates, Occupancy

The long-held belief that renovations will improve office building performance is being challenged by new data that reveals upgrades are no longer the cure-all they once were.

In the past, office renovations in Texas helped push occupancy levels by 430 basis points and asking rates by an average of $2.46 per SF. But with the rise of hybrid work and other factors, the same pattern hasn't held true for buildings renovated in 2020 and 2021.

“The pandemic shattered this paradigm,” Steve Triolet, senior vice president of research and marketing forecasting for Partners Real Estate, said in an unreleased report shared with Bisnow. “With remote working becoming the new normal, the value proposition of the traditional office space has changed dramatically.” 

Triolet analyzed Texas office buildings renovated before and during the pandemic. He found that buildings upgraded between the beginning of 2020 and the end of 2021 didn't see a boost in overall occupancy. Instead, the decline in occupancy slowed compared to unrenovated properties.

Those same buildings saw rental rate increases of 79 cents per SF two years after renovations were complete, a significant decline compared to the $2.46 per SF seen in buildings renovated between 2016 and 2017 at the same two-year mark.

The Partners report examines office buildings across Texas' four major metros. In the past, renovations in Dallas-Fort Worth pushed occupancy by 500 bps on average versus 360 bps today. Pre-pandemic renovations increased asking rates by $2.43 per SF, a figure that is down to $1.71 per SF today.

That trend is mirrored in the Houston market. Pre-pandemic renovations pushed occupancy by 389 bps and rental rates by 53 cents per SF, but the boost today is down to 279 bps and 32 cents per SF.

The shift presents a “complex puzzle for landlords, developers and the future of office space itself,” Triolet wrote.

If renovations no longer have the same effect on building performance, questions around what should become of aging properties become more complicated, the report says.

Conversions have created a buzz around potential solutions for the struggling office market. But fewer than 100 properties totaling 11.6M SF have the combination of vacancy and floor plate size needed for a conversion to work, Triolet found.

“Good candidates for conversion/adaptive reuse are 49 years old,” Triolet wrote. “For all Texas markets, less than 3% meets key criteria for conversion.”

Strategic investments in highly desirable areas still hold value, according to the report. But owners must pay close attention to what resonates with tenants in the new era of work.

“The future of office renovations is not about replicating the past,” Triolet wrote. “It’s about understanding the evolving needs of tenants and creating spaces that are functional, flexible and inspiring.”