Clark Hill 2026 Commercial Real Estate Market Update: Adapting Suburban Office Space for New Uses

In the post-pandemic world, office leasing has continued to grow year over year, but the strength of the growth is inconsistent across the asset class. Notably, Class A, downtown office space, has rebounded while the market for suburban office space has not seen the same success. Companies with a suburban footprint have downsized, moved into urban locations and in many cases, fully moved to work from home structures. Of course, with rising vacancy rates and the corresponding slump in purchase prices, entrepreneurial real estate investors have targeted these types of buildings as sources of excess growth rates. In addition to use for traditional office uses, two particular uses have stood out to investors: conversion to medical office and warehousing and storage, both of which provide unique challenges but can provide the desired returns.

One area that offers promise to suburban office owners is medical use. The medical industry continues to grow in the US, both with traditional doctor and outpatient offices, and newer uses, such as medical spas. The sector is also immune from work from home schedules. There are, of course, challenges that need to be considered with converting traditional office to medical office space. First, if the zoning requirements of the local area permit the change, there may be restrictions recorded against the office park which prohibit medical use and the developer will need to negotiate a solution with neighboring owners. In particular, office parks often have documents recorded against title which prohibit or curtail such use. Further, the accessibility compliance standards for medical office space is often more stringent than for traditional offices and how to address non-conformance of existing buildings can be a key point in negotiating medical leases. Finally, in states with limitations on power and water usage, the power draws for medical uses are often greater than for traditional offices. Therefore, owners need to be careful not to overdraw the capacity of their particular buildings or look to alternative sources for utilities.

In addition to medical uses, many investors are pursuing conversions of existing office space to warehousing and self-storage. While the use may seem unnatural, suburban office buildings are climate controlled, located close to residential populations and have large floor areas. Of course, from a legal perspective, there are several problems to address. Zoning classifications that permit office use often restrict light industrial uses such as storage.  This is because many municipalities are concerned that the corresponding tax revenues will be lower and thus hesitant to approve changes in zoning that reduce the tax roll. Second, while reconverting an office building to medical use can be done with tenants in the building, it is difficult, if not expressly forbidden, to re-demise for storage while there are tenants occupying a building. Consequently, the process requires careful negotiation with existing tenants to resolve these issues and potentially terminate said leases early. Finally, negotiating a change in use with lenders can be difficult as conversions take time, potentially violate operating covenants and are not guaranteed a quick return on investment.

Suburban office space provides a unique opportunity in the current environment. Purchasing and re-tooling existing buildings provides opportunities for entrepreneurial investors but requires the developer to address many challenges. Our office can provide the wherewithal to address many such challenges.