SPECIAL REPORT: Meet The Office Owners Fighting To Save Thousands Of Older Buildings
Over the last three years, the office market has been punched repeatedly, knocked down and nearly counted out. But across the country, thousands of small office owners are patching up their wounds, getting back in the ring and continuing the fight.
The office owners most often heard from nationally are the top prizefighters, publicly traded companies like Boston Properties and Vornado, or private institutional giants like Nuveen or Hines. Listen to their executives, and you’ll hear common refrains about how their portfolios, filled with the iconic, trophy assets that are poaching tenants from older buildings, are outperforming the larger market.
When these companies do feel pain, such as when Brookfield defaulted on a series of office loans across the country earlier this year, they have the financial wherewithal to absorb those losses, hand over the keys to the buildings and keep investing in other properties.
That is not the case for most office owners. Overshadowed by the big-name landlords are a sea of little-known private investors, from family offices investing their inheritances to small businesses scraping together money for each deal.
Their properties tend to be older, less centrally located and out of the spotlight. Often referred to by brokerage firms as Class-B and Class-C, these buildings have been on the losing end of many corporate relocations in recent years, especially as the pandemic led companies to consolidate offices into higher-quality buildings and abandon assets that don’t seem as attractive to their employees.
The U.S. has nearly 2.1B SF of office inventory that Avison Young defines as Class-B, which is defined based on a building’s location, age, rent prices and amenities. Through the first half of this year, the segment recorded a net occupancy loss of 14.8M SF, bringing its vacancy rate up to 20.9%, the firm’s latest report found. That is up from roughly 15% vacancy in the first quarter of 2020.
When these owners see their occupancy fall, it can put the health of their business — or the savings of their families — at stake, and when they decide to invest more in upgrading their buildings, as many of them have, it can often mean going all in to save their properties.
Bisnow spoke to 15 of these small owners across the U.S. and UK, from a startup investor in Phoenix to an accountant in Miami to a family office in London. These landlords have taken their lumps, from lost office tenants to slow leasing volume to issues paying their loans. But through dealing with this pain, they have developed a host of new strategies to backfill their buildings, such as operating their own coworking spaces, breaking vacant floors up into smaller spec suites, offering more concessions and dropping rent prices.
“Cash flow basically disappeared,” said Ira Fishman of New York-based Resolution Real Estate about the firm’s 40K SF office building at 242 West 38th St. in Manhattan.
The 1920s-era building saw a series of tenants vacate in 2020, and its occupancy fell to 50% in less than a year.
“A lot of them don't have major assets,” Fishman, Resolution's executive director of leasing, said of the tenants. “And when the business fell [during the pandemic], they had no income to pay the rent … We lost most of our tenants due to that. They just went out of business.”
Feeling The Pain
The damage wasn’t limited to 2020, and it didn’t end after Covid vaccines were distributed and people started resuming most everyday activities. It has been felt throughout the last three years in all corners of the country as companies have re-evaluated their office needs amid the shift to remote and hybrid work schedules.
BLT Enterprises President Rob Solomon, whose Los Angeles-based firm started in 1984 by building recycling and waste facilities before expanding into commercial real estate investing, now owns 200K SF of “creative” offices in the West Los Angeles, Santa Monica and Hollywood neighborhoods. The buildings saw a slight leasing bump after the pandemic-era lockdowns lifted, but he said in the time since, they have felt a slowdown due to the staying power of remote work.
Solomon was signing leases for office space in 2021, but he said it’s much harder now as many of the types of tenants he often attracted are rethinking if they need an office at all. Solomon said he has about 40K SF of office space in the portfolio that is vacant, and he has not leased any space this year so far.
Last year, he had a tech tenant on the hook for about two-thirds of the vacant space — “I had the leases on my desk, ready to go,” he said — but in November, the tenant pulled out because it decided to reconsider its space needs.
“Marketing has been tough sledding,” Solomon said, adding that there haven’t been many tours or much interest.
Justin Smith, founding partner of Dallas-based office owner TXRE Properties, said the pain has been particularly felt in the buildings he considers Class-C, which have vacancy rates noticeably higher than their Class-A and B properties.
“The Class-C buildings are definitely struggling,” Smith said. “We’re seeing much more tenant defaults, and we’re seeing a greater number of tenants not renewing their leases.”
In Houston, Boxer Property President Justin Segal said the firm saw its portfoliowide occupancy fall about 3% from pre-pandemic levels to its Covid-era low, but the losses were especially concentrated in the firm’s urban properties.
“The properties that we have that are in core downtowns are having more trouble,” Segal said. “And the ones that are in the suburbs are doing very well.”
Landlords with high levels of debt face the risk of losing their buildings as vacancies rise. In the CMBS sector alone, more than $50B of loans tied to office buildings are set to mature in the next 18 months, and the private banking sector has billions more. By the end of 2026, loans on 18% of Class-B offices in the U.S., encompassing 594M SF, are scheduled to mature, according to a CommercialEdge report.
One small landlord in New York faced this issue earlier this year: Hilson Management Corp. President Jeremy Schwalbe. The firm, a business started by Schwalbe's grandfather after he immigrated from Belgium in 1939, owns 550K SF of Class-B and C offices in the Midtown and Midtown South neighborhoods, and it was unable to pay the remaining $32.9M on its loan for 385 Fifth Ave. ahead of its maturity, so it asked to transfer the CMBS debt on the 100K SF Garment District building to special servicing.
Schwalbe said the company’s portfolio is 90% leased, but the rise in interest rates has made it difficult to pay off the loan. He said his family has always viewed tenants and lenders as partners, and he believes there will be a “positive outcome for everyone.”
For an asset manager at a private equity firm, it might be a bad day at the office, but Schwalbe was brought into the real estate business the old-fashioned way. In high school, college and graduate school, Schwalbe worked alongside his grandfather.
“I grew up in this business, running freight elevators, working on air conditionings, checking staircases, flushing toilets,” he said. “He started me at the beginning.”
Being in a position to lose a building that his grandfather bought decades ago was nerve wracking, he admitted.
“It was, it was, I'm not going to sugarcoat it,” Schwalbe said. "The way we got through it was we were very ahead of the problem, as opposed to being caught with our pants down. That is key in many, many respects.”
Late last year, Brian Fitzgerald had a wake-up call. As the CEO of Royco Properties — a 70-year-old firm that invests the family fortune of a D.C.-area concrete industry magnate into local commercial real estate — Fitzgerald had fielded a lease inquiry for one of his office buildings in Silver Spring, Maryland.
The World Building, a 58K SF 10-story local landmark constructed in 1965, had previously stayed at least 90% occupied, but its stability was disrupted by the pandemic.
“We woke up one day and we said, ‘Oh my god, we’ve had no new leases for three years and the building went to 30% vacant,’” Fitzgerald said.
Royco has since brought its occupancy back up to 84%, and it used the pandemic to renovate and build out fully furnished suites. It’s not at its former occupancy level of 90% to 95%, but Fitzgerald said he is confident it will get there.
“We’ll get back to that stable place because we understand the niche the building fits in the market,” he said.
His other properties are also around 80% occupied, but Fitzgerald feels confident that those, too, will see brighter days, given some patience.
“I think we can get them back,” he said. “I think it’s going to take a little time and take a little money, but we’ll get them there.”
Healing The Wounds
As small landlords look to bring their buildings back to life, they are embarking on a series of strategies to compete for tenants. These moves often cost them money — whether in the form of upfront investments or reduced rental income — and they aren’t a guaranteed success, but owners say they are necessary to keep their businesses afloat in the choppy waters of today’s office market.
Daniel Bleier, who owns and manages one 20K SF office property in Evanston, Illinois, said a major tenant moved out during the pandemic and left about half of the building vacant. He then decided to turn the empty space at the century-old 805 Greenwood St. building into coworking under his own brand, Office 805.
“After Covid, it was hard to find regular tenants,” Bleier said. “That's why I ended up using this building as a coworking spot. Because it was easier for me to find people that would rent for a month or three months or whatever they were.”
But occupancy has fluctuated, and without the ability to rely on a set amount of income each month, Bleier said it has been tough to get by. He said he is fortunate to have very little overhead.
“The more I get into it, it's a tough model to make money on,” Bleier said. “If I had an overhead and everything else, I'm not sure I'd make anything. Everybody now thinks that the magic bullet is all coworking. Well, I don't know. I don’t know.”
Since operating a coworking space can be challenging, some landlords are seeking to capture part of the model’s appeal — small, furnished spaces that can be leased out quickly with flexible terms — without having to manage a shared workspace.
Howard Dvorkin, a South Florida-based accountant and owner of Debt.com, acquired five office buildings in Broward and Palm Beach counties during 2020 and 2021. He said the buildings are on the older side, and he has upgraded them with lobby renovations.
He is also converting spaces that were once leased to tenants like call centers that have downsized due to the remote work shift. His tenant base is no longer looking for large footprints, but he’s finding success in breaking down large suites into smaller offerings. His properties in Palm Beach have filled up, but in Fort Lauderdale, he recently switched brokers to help boost his buildings' 80% occupancy rate.
“In South Florida, there’s not a lot of demand for bigger spaces. You’ve got to have that perfect tenant that doesn’t come by all the time,” he said. “So we’re chopping up all our spaces to 3K SF to 4K SF, and a couple will go up to 5K SF, and we’ll see how that works.”
Philadelphia-based Vince Jolly, the chief operating officer of CVA Commercial Group, has seen the benefits of flexible leasing at the five-story, 179K SF office building in Philly’s Fishtown neighborhood he acquired this past March. He had been representing the previous owner in leasing the building for years, and he knew that tenants touring the property since the pandemic began have been seeking flexibility in terms of lease size and length.
“Office is challenging for some larger buildings, but we can offer small, short-term, flexible leases,” Jolly said.
Finding the right strategy — at the right price — is key. Baltimore-based family real estate firm Byrnes & Associates acquired a pair of downtown office buildings spanning 90K SF for $2.1M in 2021, when they were 5% occupied.
The firm found leasing success by breaking the building into smaller floor plates, principal Brad Byrnes said, finding that the post-pandemic sweet spot is about 5K SF. Byrnes also invested in amenity spaces like a rooftop lounge and converting the old trading floor and law library into a mix of gathering and conference rooms.
As a result, the firm has signed more than 60 leases and brought the buildings up to 65% leased, he said. Byrnes also credits the leasing momentum to the firm's strategy of leaning into the character of the historic buildings, which were home to a pioneering Baltimore investment house and are among the most beautiful in the city in terms of architecture, materials and craftsmanship, he said.
“We have copper windows. You tell me, how many buildings have copper windows?" Byrnes said. “If you ever see me melting these [windows], then you know things are going south. But until then, we will polish them and make them shine."
In addition to renovating buildings, some small office owners have retooled their strategies for marketing spaces and finding tenants.
Jean Taylor is the managing director of Wimbledon Offices, a firm founded by her grandfather that owns three small office buildings in the leafy outer London town of Wimbledon. Besides enlisting a leasing agent, the firm posted its available space on a variety of listing sites to find tenants.
“The difference now is that you have to be really proactive,” said Taylor, whose son, Luke is facilities and IT director. “There isn’t the queue of enquiries any longer, but I think that the fact we are a family company makes us popular with a lot of smaller businesses, which are perhaps stepping up from serviced or coworking spaces for the first time and want to make the move into their own offices.”
Boxer Property’s Segal, whose firm owns 14M SF of office space, said the company's leasing activity has improved in recent years because it uses overseas teams to answer inquiries 24 hours a day. The occupancy across the portfolio now ranges from percentages in the 70s to the 90s, he said.
“Sometimes just simply by answering the phones, by being available, we've been able to capture a disproportionate share of the market,” Segal said.
With the market as weak as it is today in many cities, the strategies of breaking up office floors, renovating buildings and being more proactive in leasing outreach often aren’t enough.
Many landlords have been forced to make financial concessions, such as higher tenant improvement packages and lower rent prices. And when that doesn’t work, they have looked to pivot offices to other uses.
“We definitely have to work harder to keep a tenant, which means we are offering higher TIs in order to get them to stay,” said Jen Price, principal at Boston-based Legacy Real Estate Ventures. “We are still seeing the ‘kick the can’ method where they are doing shorter renewals, because they still don’t know what they want.”
Legacy owns 10 Class-B office properties, mostly in the Boston suburbs, and it recently lost an 8,700 SF tenant at its 89K SF building in Lowell. Instead of putting it back on the market as traditional office, the company pivoted to converting it to flex office space. It is pursuing building permits for the change and marketing it to light medical and other flex users.
“Flex is still in incredible demand,” Price said. “We need to be creative in that sort of situation, and we are lucky we can convert, because in that market, there would be a problem.”
In some cities that are setting mandates for building emissions, older office buildings are required to make big investments to bring their properties up to code, and it often isn’t possible to finance the upgrades necessary to keep the building as office.
By 2027, all UK offices must have an energy performance certification of C or it will be illegal to lease them. Less than a quarter of London offices have that rating today.
“The ESG issue is rearing its head, and on the back of that, smaller offices don’t get the economies of scale to benefit from making improvements,” said Prideview Senior Consultant Dilip Shah, which acts for private investors at the smaller end of the market.
He said getting an older office building to meet leasing regulations might cost £100 per SF ($125 per SF). It’s not worth spending that much on a 5K SF office because the rental uplift won’t cover the cost.
That means owners are selling, and are willing to sell at significant discounts to previous values. Prideview is buying, but with a view of converting offices to other uses, like nurseries, schools for pupils with special educational needs or even cryptocurrency mining facilities.
Resolution’s Fishman said he was forced to bring down rents to fill the vacated space at his West 38th Street building, which he said is now around 80% leased. It has signed a Pilates studio, a garment company, a company selling CBD products and some general office use tenants, with leases averaging 3,800 SF.
“Instead of getting $50 a foot, we're getting deals $30 to $32 a foot, $33 a foot,” Fishman said. “But we can hold onto the property.”
Riding It Out
Despite the pain they have endured in their portfolios and the time and money they have spent to keep their buildings alive, most owners who spoke to Bisnow said they still believe in the long-term viability of smaller, older office buildings.
Arizona-based Streamline Capital Group launched in January, then made its first acquisition this summer of a 40K SF office building. Principal David Hrizak said the company is embracing the Class-B segment as it looks for more deals.
“When times are good and businesses are formed, or businesses move out of their homes, they move into a Class-B,” he said. “When times are bad, they move out of Class-A to Class-B. We're able to catch the up wave and we're able to catch the down wave. We serve small businesses, and most businesses in America are classified as small businesses.”
While large relocations and Fortune 500 companies get most of the ink, generational owners with older buildings and smaller portfolios still are seeing results from emphasizing the personalized touch and longstanding relationships.
When many of Hilson Management's tenants were struggling during the worst of the pandemic, Schwalbe, his father, brother and two cousins called all 250 businesses that lease space in their Manhattan buildings to check on them and work out deals where they could to help them make it through.
“We are mom and pop,” he said. “When tenants ask us questions, they get an answer. There are no boards, nothing else out there.”
Landlords of older buildings that offer offices at a relative discount also benefit from a dwindling supply, as many of their peers are demolished or converted to other uses and as new office buildings tend to target top-of-market rents.
“The new buildings and all of the amenitized space comes at a price point that, generally, our tenants are not interested in paying for,” Legacy’s Price said. “There will always be competition and always be new buildings, but they are not making any more Class-B buildings.”
D.C.-based Royco has sold three office buildings over the last decade, targeting those that “tended to eat up more cash than makes sense for our company,” Fitzgerald said. But he said the company believes in the office sector enough to hold onto the remaining three buildings it owns, and it is financially positioned to do so.
“Today is a time for patient owners that have the capital and the resources to ride it out,” Fitzgerald said.
While TXRE’s Smith said his Class-C buildings are struggling and the top-of-market buildings can be more expensive to operate, he said the middle segment of the market has proven to be a sweet spot.
“The best margins are in that tweener — that B-plus, A-minus market,” he said. “You can afford to increase rents to make up for higher tenant improvement costs.”
Smith said he is not only confident enough in the office market to hold onto the buildings in TRXE’s portfolio that he began amassing in 2004, but he plans to one day hand them down to his daughters.
“I have zero fears of office becoming a sector that cannot provide for my family or my heirs,” he said.
Jon Banister, Bianca Barragán, Adam Bednar, Taylor Driscoll, Mark Faithfull, Miriam Hall, Ciara Long, Olivia Lueckemeyer, Maddy McCarty, Mike Phillips, Dees Stribling, Matthew Rothstein, Jarred Schenke, Ryan Wangman, Matt Wasielewski and Emily Wishingrad contributed to this story.
CORRECTION, SEPT. 19, 4:35 P.M. ET: A previous version of this story misspelled David Hrizak's name. This story has been updated.
