It has been two years since we first introduced the FACTS (flexibility, amenity, connectivity, technology and sustainability) framework to evaluate office space in the post-Covid world. While some trends have played out broadly along the lines that we had envisaged in mid-2021, others have turned out differently. On the one hand, we expected more flexible working, a flight-to-quality, and rent premiums for FACTS-fit offices. On the other hand, there has been less emphasis on de-densification than expected. You can read the full paper on our website.

The difference in how occupiers behave (and how that has affected pricing adjustments) across different markets also appears to be starker than we anticipated. The return to the office has been the slowest in the US, while office occupancy in Asia-Pacific (APAC) is now above pre-Covid levels in some markets, according to a Wall Street Journal report. Consequently, offices in the US are experiencing the most pressure in terms of pricing, while the correction in APAC has been relatively muted.  

What do we do with non-FACTS-fit offices? 

The five FACTS have become even more important today for offices to remain competitive. This is especially the case in three key areas.

Firstly, in terms of flexibility, companies are trying to increase the amount of flexible space in their portfolios, including working with third-party providers. About 40% of companies surveyed by JLL planned to increase the amount of flexible space in their portfolios over the next three years. This is especially the case for larger companies.

Secondly, for amenities, the hardest-hit offices have been in the US, which has the most vacant space post-Covid. Most of these offices were built between 1980 and 2009, and they are in areas with high crime rates and few external amenities. According to CBRE’s estimates, these hardest-hit buildings accounted for 80% of total occupancy loss between the first quarter of 2020 and the fourth quarter of 2022, across the tracked US markets.

The third key area is sustainability, where 3-3.5% of existing office stock needs to be retrofitted every year to meet the net-zero target by 2050 (the current rate is just 1%).

Sell, upgrade or convert

For offices that score poorly under the FACTS framework, it might be helpful to run the asset through a sell, upgrade or convert screen (or SUC-S) to determine the next course of action.

Overall, we rank the upgrade route (FACTS-fit refurbishments to enhance competitiveness) ahead of the conversion route (mainly to residential use). An upgrade is likely to involve fewer complications, especially if the building is not fully vacated. Offices that score well in terms of location – high scores for A (amenity) and C (connectivity) – but still have an overall FACTS score of under 75% (not FACTS-fit by our definition) are prime candidates for consideration. 

If changing to an alternative use, we prefer a conversion over a redevelopment from a cost- and carbon-footprint perspective. According to Gensler, conversions are typically 15-20% less expensive than new apartment buildings, with a faster time to market. In addition, a 12-storey conversion (versus a redevelopment) can prevent the release of 1.5 million kilos of carbon dioxide into the atmosphere. This is equivalent to a jet flying around the world over 100 times.

When neither an upgrade nor a conversion is feasible, we would recommend a sale.

Further price adjustments required to incentivise upgrades and conversions

Despite the pricing adjustments so far, there is room for further corrections to incentivise more FACTS upgrades and/or conversions to alternative uses. The average office yield for the fourth quarter of 2022 was 5.6% across major global cities. Using this figure as a benchmark, our estimates suggest that the entry yields may need to be at least 140 basis points (bps) or 25% higher in the case of a FACTS upgrade. In the case of a conversion to residential use, entry yields would need to be 700 bps or 125% higher to be feasible. In the latter case, there are also physical constraints that have made conversions either too challenging or costly. 

An important reason as to why office-to-apartment conversions have been more successful in the US could be the smaller difference between apartment and office rents. A November 2021 study by the National Association of Realtors found that in the 27 metropolitan areas in the US with the biggest decline in office occupancy, 22 had market conditions that favoured conversions, including higher apartment rents versus office rents. 

Our next paper on the office market will focus on some lessons from the US experience on office-to-apartment conversions that may apply to other markets. 

It has been two years since we first introduced the FACTS (flexibility, amenity, connectivity, technology and sustainability) framework to evaluate office space in the post-Covid world. While some trends have played out broadly along the lines that we had envisaged in mid-2021, others have turned out differently. On the one hand, we expected more flexible working, a flight-to-quality, and rent premiums for FACTS-fit offices. On the other hand, there has been less emphasis on de-densification than expected. You can read the full paper on our website.

The difference in how occupiers behave (and how that has affected pricing adjustments) across different markets also appears to be starker than we anticipated. The return to the office has been the slowest in the US, while office occupancy in Asia-Pacific (APAC) is now above pre-Covid levels in some markets, according to a Wall Street Journal report. Consequently, offices in the US are experiencing the most pressure in terms of pricing, while the correction in APAC has been relatively muted.  

What do we do with non-FACTS-fit offices? 

The five FACTS have become even more important today for offices to remain competitive. This is especially the case in three key areas.

Firstly, in terms of flexibility, companies are trying to increase the amount of flexible space in their portfolios, including working with third-party providers. About 40% of companies surveyed by JLL planned to increase the amount of flexible space in their portfolios over the next three years. This is especially the case for larger companies.

Secondly, for amenities, the hardest-hit offices have been in the US, which has the most vacant space post-Covid. Most of these offices were built between 1980 and 2009, and they are in areas with high crime rates and few external amenities. According to CBRE’s estimates, these hardest-hit buildings accounted for 80% of total occupancy loss between the first quarter of 2020 and the fourth quarter of 2022, across the tracked US markets.

The third key area is sustainability, where 3-3.5% of existing office stock needs to be retrofitted every year to meet the net-zero target by 2050 (the current rate is just 1%).

Sell, upgrade or convert

For offices that score poorly under the FACTS framework, it might be helpful to run the asset through a sell, upgrade or convert screen (or SUC-S) to determine the next course of action.

Overall, we rank the upgrade route (FACTS-fit refurbishments to enhance competitiveness) ahead of the conversion route (mainly to residential use). An upgrade is likely to involve fewer complications, especially if the building is not fully vacated. Offices that score well in terms of location – high scores for A (amenity) and C (connectivity) – but still have an overall FACTS score of under 75% (not FACTS-fit by our definition) are prime candidates for consideration. 

If changing to an alternative use, we prefer a conversion over a redevelopment from a cost- and carbon-footprint perspective. According to Gensler, conversions are typically 15-20% less expensive than new apartment buildings, with a faster time to market. In addition, a 12-storey conversion (versus a redevelopment) can prevent the release of 1.5 million kilos of carbon dioxide into the atmosphere. This is equivalent to a jet flying around the world over 100 times.

When neither an upgrade nor a conversion is feasible, we would recommend a sale.

Further price adjustments required to incentivise upgrades and conversions

Despite the pricing adjustments so far, there is room for further corrections to incentivise more FACTS upgrades and/or conversions to alternative uses. The average office yield for the fourth quarter of 2022 was 5.6% across major global cities. Using this figure as a benchmark, our estimates suggest that the entry yields may need to be at least 140 basis points (bps) or 25% higher in the case of a FACTS upgrade. In the case of a conversion to residential use, entry yields would need to be 700 bps or 125% higher to be feasible. In the latter case, there are also physical constraints that have made conversions either too challenging or costly. 

An important reason as to why office-to-apartment conversions have been more successful in the US could be the smaller difference between apartment and office rents. A November 2021 study by the National Association of Realtors found that in the 27 metropolitan areas in the US with the biggest decline in office occupancy, 22 had market conditions that favoured conversions, including higher apartment rents versus office rents. 

Our next paper on the office market will focus on some lessons from the US experience on office-to-apartment conversions that may apply to other markets.