Office Owners are Looking to Diversify Their Portfolios

Many of the most prominent office developers in the U.S. are shifting gears, looking to buy or build real estate that isn’t office space. This shift is being driven by a number of factors, including the rise of remote work, the increasing popularity of co-working spaces, and the desire for greater flexibility in office space.

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Boston Properties Inc. is planning to develop 2,000 residential units along the East Coast. The company also owns more U.S. office space than any other publicly traded company and is developing millions of square feet of lab and life-science space.

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SL Green Realty Corp, the owner of a New York office tower, is teaming up with Caesars Entertainment Inc. in a bid to convert the building into a casino.

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Even the companies behind some of the world's most iconic skyscrapers are looking to branch out into other types of real estate. Empire State Realty Trust, which owns the Empire State Building and other office towers, started adding multifamily properties to its portfolio in late 2021. Silverstein Properties, best known for developing the World Trade Center in lower Manhattan, is raising a $1.5 billion fund to convert obsolete office buildings into apartments.

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As the Covid-19 pandemic and rise of remote work have reordered American habits around the workplace, office towers that populate city business districts have become less important. Shares of publicly traded office owners have broadly declined as investors and analysts worry that the companies’ growth prospects have been hurt by the likelihood of a long-term decline in office demand.

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Other real estate sectors, such as residential, seem to offer more promise.

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Rich Gottlieb, president of Keystone Development + Investment, based developer specializing in offices, believes that the office market is in a state of flux. However, he also believes that there is still a housing shortage in many areas. Keystone Development + Investment has four residential projects in the pipeline in South Florida and the Philadelphia region.

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Office developers who are pivoting toward residential or other property types say they remain bullish on the office business. Many have predicted throughout the pandemic that businesses will return in greater numbers because, they say, the best collaboration requires face-to-face meetings in a workspace — not over Zoom.
Office owners can point to encouraging signs, including the growing number of employers who are ordering workers back to the offices and the strong demand for space with the best facilities and locations.

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Developing state-of-the-art office space requires a significant capital investment to meet workers’ needs for the highest possible air quality, energy efficiency, and amenities.

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Tony Malkin, chief executive of Empire State Realty Trust, said that the economics of the residential business are currently more compelling. He would still buy office buildings at the right price, but apartment-building acquisitions produce an immediate return and require “minimal capital expenditure.”

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New York City REIT, a landlord whose share price has fallen below $2 during the city's recent office slump, said in a December filing with the Securities and Exchange Commission that it was moving beyond a focus on office buildings. The company said it would seek to acquire hotels and parking lots, among other non-office investments.

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There has been a shift away from new office development in recent years, which has had a moderating impact on new construction. According to data from CoStar Group Inc., office construction activity was down to 153 million square feet in the third quarter of 2022, from 184 million in the first quarter of 2020.
The popularity of residential projects is having the opposite effect on the apartment pipeline. Close to 500,000 units were completed in 2023, according to a CoStar estimate. That is up from 368,000 in 2019, the firm said.

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Some office developers began expanding into residential projects in the years leading up to the pandemic. AmTrust Realty Corp., which has a portfolio of about 12 million square feet of office space in Chicago, New York, Toledo, Ohio and other markets, completed its first residential development in 2020. The 270-unit project is located in Brooklyn.

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The pandemic has increased AmTrust's appetite for residential investment, said Jonathan Bennett, president of the family-controlled business. As one example, he noted that AmTrust has owned an office building in Tarrytown, N.Y., on a 7-acre site facing the Hudson River for years.

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AmTrust has long considered the Tarrytown building a good candidate for residential conversion. With the building's vacancy rate now high, the company is moving ahead with planning and obtaining local-government approvals for a development with scores of apartments.

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"I told my board that there was so much vacancy in the building, and that now would be the perfect time to put forward our plan," Mr. Bennett said. "If this is what you want to do, there's no better time than now."