The Trends Defining What’s Next for Stranded Assets and Building Transformation

Editor’s Note: This blog is part of our Design Forecast blog series, looking at what’s next in 2023 and beyond.

Building owners and developers are facing the challenge of what to do with stranded assets: Class B and C office buildings that sit vacant as tenants flock to more modern, amenity-rich properties. While some older buildings can be renovated to increase their appeal, others can be reimagined and leveraged for conversion to first-class residential buildings.

We sat down with Gensler’s Repositioning & Landlord Services Leader Sheryl Schulze, Darrel Fullbright, Office Buildings – Developer leader, and Steven Paynter, a studio director and Design Resilience leader in Gensler’s Toronto office who is leading the efforts to convert office buildings to residential apartments, to discuss what’s next for building conversions.

We’ve heard a lot about the conversion of under-performing or “stranded” assets into other uses, such as residential, industrial, or mixed-use buildings. What’s driving this trend?

Steven: We’ve been looking at this challenge of what to do with building conversions for over two years now. A lot of that started with our clients. They came to us and said, “tell us what to do with buildings that were struggling before and are going to struggle even more post-COVID.” And this was early in the pandemic, in April 2020.

Vacancy rates have been steadily climbing over last 10 years, and this has become even more pronounced since COVID, especially in the Class B and C market, where leases similar are not getting renewed. We’re seeing a lot of these assets being taken back — either by buildings being repossessed or through liquidation as distressed assets. This opens opportunities for new investors and developers. We’re also working with a lot of our clients to diversify their holdings from primary office to a more mixed portfolio — more residential, more industrial — not because it would be more profitable but certainly because it would be less risky. And you’re starting to see that through conversions, or through some of the big players selling their assets and reinvesting that money into different types of buildings.

When you look at vacancy rates, and the average for cities, it doesn’t really tell the whole picture. That’s why we’re focused on the lower class of buildings, the older assets that are 40-50 years old that need a stronger repositioning approach.

The pandemic also really hurt downtown businesses, retailers, service providers, and restaurants. It reduced tax revenue and increased issues around homelessness and crime. Bringing people back can help solve those problems. If they’re not coming back to the office five days a week, then we need people living there, we need to diversify the use of downtowns to make them more lively, 24/7, and vibrant. That is why we worked with the City of Calgary in 2020 to study their downtown core and it’s why we’re now working directly with over a dozen U.S. cities to look at a citywide approach to conversions.

Darrel: A catalyst to bring these central business districts back is to make them 24/hour cities and remix up these communities. One way to do that, rather than building new, is to convert outdated assets that are office buildings, usually Class B and C. Our challenge is figuring out how to do that at a community scale.

Many of our clients would like to build new but there are financing challenges. Right now, because of interest rates, rising costs, and inflation, our clients are having trouble getting deals and capital. There are a lot of economic headwinds preventing developers for developing projects from scratch. That, in itself, may force some clients to look at repositioning.

Sheryl: We’ve been following this topic of repositioning stranded assets over the past year. It’s not a new trend. Everyone’s talking about it; however, it’s not getting the traction it needs yet. The one thing we’ve seen is more building conversions. We’re seeing fewer buildings become all office — everyone is trending towards more mixed use. Our urban areas need to be more mixed-use, experiential destinations.

The majority of our clients that were solely in the office arena have