Empty Office Buildings - What's Next?

0:00This is Real Estate This Week with Stephen Gasquay. 17 years on air and online, helping you succeed in buying, selling and investing in property. The best real estate strategies out there, just for you. Welcome to Real Estate This Week. Hi again, I'm Stephen Gasquay and I'm so glad you're here as we look at what's next for empty office buildings. That's right, so many office buildings never recovered after so many people left to work from home. Millions of square feet in those buildings remain empty and so far there's no clear path forward. But there are ideas, some that work and some that don't. Let's talk about it now with a commercial real estate expert.

1:01Joining us is Bill Milliken, realtor and broker owner of Milliken Realty in Ann Arbor, Michigan, the former president of the Michigan Real Tours and also the former president of the commercial board of realtours in Michigan. Bill also served as a regional vice president at NAR and was chair of its commercial committee. And currently he's one of seven members of Michigan's Mackinac Bridge Authority. Bill, welcome to Real Estate This Week. Glad to be back at Real Estate This Week, thank you Stephen. I am so glad you're with us. So first of all Bill, how's the real estate market in Michigan? Well, office space is not jumping off the shelf, but that's a national trend that's not unique to us here. It does drill and retail are a pretty good shape. Detroit has had some tremendous successes in revitalizing downtown Detroit, going blindsly to Dan Gilbert.

2:04You may know him through quick in and Brockett Mortgage. He's also the owner of the Cleveland Cavaliers and he's invested heavily in the Detroit market. Principal among them is the new Hudson's tower that is 49 stories and 1.5 million square feet of office, hotel, condominium and retail. And it's on top of the old Hudson's department store site, which is famous to the city. General Motors has moved their headquarters from Renaissance Center into Hudson's Detroit. So they're the anchor tenant that we're proud of the way the buildings developing. Interesting Bill, and you know that sort of brings me to the first topic I wanted to ask you about. And that is office buildings. Now here you are explaining that there's a brand new giant office building going up in Detroit. Now, doesn't that sort of buck the trend that office buildings are really in trouble?

3:08It does, but city center Detroit is unique primarily because of the Gilbert holdings there. 17,000 of their employees that they have moved from suburban locations around Detroit back down into the city. They have acquired, restored and remarketed a lot of Detroit's old historic building stock. One of the things about Detroit being passed over during the last decade when a lot of other cities were booming was that nobody was looking at Detroit. So a lot of the old historic architecture that's now prized is still there. Dan Gilbert has acquired it, restored it, made it historically accurate. And that space is in demand and selling. A lot of prime retail has moved back into downtown Detroit on Woodward Avenue. There's a new Apple store. Gucci is there. Warby Parker is there. A lot of new vibrant retail. So it's a great place to come down for a Friday evening and find a restaurant and spend a nice pleasant urban moment.

4:16That sounds great. You know, Bill, it has been a while, but I have been to Detroit many, many times. And I love that city. And I love the fact that it is coming back strong. So let me ask you a few questions now. As we all know, back when the pandemic began, a lot of offices emptied out because so many people were working from home. Now you just mentioned a success story, but let's look now at the bigger picture. Have offices recovered from that? Or are they still empty all across America? It a word no, but we've got several tiers of office space. We've got class A office space, which is either new or maintained at a very high level, which obviously commands the highest price in the market. We've got class B in spaces, which are older, showing a little aware, not maintained at the top of the notch anymore. And class C, which is some of the very plain functional space that sometimes start up businesses get into or businesses that have been there for a long time.

5:23And don't need a premium location. But if we look at office space in total, the architects will tell you that maybe 25 to 30% of it lends itself to conversion. One of the requirements for residential use in old office space is natural light. So if you've got a large floor plate, nobody wants to live in the center of a large floor plate with no windows. So you've got to have a intermediate size building. The mechanical systems and the technology in the building can't be outdated. Old steam boilers aren't going to have kept the mustard very well. So that eliminates a lot of office vacant properties from development for conversion. In San Francisco, the exception was one high rise office building there that with big floor plates, they went to the expense of driving a core down the center of the building to provide natural light for the interior square footage.

6:26Wow. And that worked, but that was also very expensive. And there are a lot of buildings that lend themselves to that kind of capital improvement. And you know, Bill, I'm really glad that you brought this up because as we know back when so many offices were empty and people were wondering what is going to happen to these big buildings, there's a lot of conversation centered on changing them into residences. But as you just explained, it's not that easy. You can't just take out the desks and the IT rooms and put in couches and beds. No, that doesn't work. One interesting exception is Washington, DC. And Washington has done a lot of rezoning. They put in a lot of 20 year property tax abatements programs to help owners undertake the cost of conversion. And they hope to do. But then it's 600,000 square feet of conversion in the district of Columbia last year.

7:29And they've got a goal of approximately 7 million square feet of commercial space that they're going to bring to market as residential in the city. They're trying to get people to move back into the district of Columbia. And that's probably as aggressive a conversion program as you'll find in the country. But Washington DC has decided that it's necessary. Well, that's interesting. And perhaps that will form a template for other cities that are thinking about the same process. Well, zoning is a big problem in municipalities all across the country. It's generally restrictive. And it doesn't lend itself to broad thinking about how to put a lot of those properties back into service. Having said that, some of the properties are simply old. And they probably would lend themselves more than demolition and they do to redevelopment and being repurposed in some fashion. I see. But zoning communities need to look at their zoning and make sure that they're supportive of this kind of conversion effort.

8:34And so Bill, if an office building remains mostly empty and it is not a good candidate to repurpose as residential. And there's just no tenants coming forward. What will happen to buildings like that all across America? Well, part of it's going to depend on what the ownership is whether there's debt on it or not. Some owners that on the buildings, free and clear don't have debt. They believe that they're able to carry it for a few years until maybe the market will turn around. Maybe they've got neighbors nearby that are vital uses that will spread to their building. It does pose a problem for a lot of functional absolute buildings. So are we thinking about demolition? Yep. There are buildings in metropolitan Detroit that look good to the eye when you're driving down the expressway that it's simply been demolished because they're functionally obsolete. Or there's simply no market for the square footage that they offer. And so this might require a little bit of crystal ball on your part Bill.

9:36But if they do demolish a great big office building that just can't make it work anymore, what can they possibly put on that site that's brand new that's going to be successful? Well, there's some variables there. It depends on the neighborhood. It depends on the community and how receptive the community is. It depends on the developer to see what kind of an idea that they've got that can bring the life there. Maybe City Council has got some tech incentives to help them with redevelopment of the property. But if it were easy, everybody would be doing it. But it creates like minds find a way. Absolutely. Absolutely. And one more question about those empty buildings Bill. You know, many of them had or still have retail on the ground floors. I mean, we are looking at coffee shops, clothing stores, pharmacies, restaurants, all sorts of things. Now, are those businesses still doing well?

10:36And does the empty building above them affect their bottom line? Sure. Dramaticly. Restaurants are really suffering when they're in a building or in a urban neighborhood or people aren't coming downtown to work any longer. We still haven't resolved the return to office the number of days a week that companies are having their employees back on site. Some employers were going back five days and they'd lost some employees. This is a result of that. Some cities that have a vital core have converted residential uses downtown. And in our work where I'm talking to you from today, there are people that live downtown, work downtown, and don't own an automobile. And they're proud of it. And so that's a new urban dweller that is populating some cities around the country. And there it's an interesting trend to watch. Has there been any action among the owners of these empty office buildings to approach, for instance, universities?

11:39And say, we will donate this to you. And this can be all your classrooms in one building. What about that? Those are candidates for it. But there are a lot of ingredients that it's got to be a university whose enrollment is increasing. And secondary education enrollments are declining. The higher education looks at that trend, they look at their campus and their amenities and wonder whether or not they can... There's need to expand, but they can justify it. The University of Michigan and Ann Arbor, Michigan, is aggressive, is growing, continuing to acquire private and institutional properties to expand its campuses, their multiple campuses in Ann Arbor. But that's the exception, rather than the rule. The reason I asked about that is the university that I attended was really tight on dorm space. And they went out in Baltimore. They went out and bought just about every single apartment building they could find and made them all into student housing.

12:40And it's been a big success for them. I was just wondering if that might be happening elsewhere, too. Well, let me speak narrowly to Ann Arbor again. This fall, next month, the University of Michigan will be opening new dormitories that they have constructed adjacent to the central campus for over 2,000 students. And prior to the acquisition of this acreage, these were single-family residential homes that bordered downtown. And the University acquired all of the acreage, demolished all the homes. And they have built a five-story building, several five-story buildings to accommodate this new flood of students. So they'll be coming into town next month. That's great. That is great. And Bill, as you see the brand new beautiful office building going up in Detroit, do you think that some day cities all across America will experience the same thing?

13:43And that the buildings will be going back up and they'll be filled and there'll be a success story? Not universally. It's going to be the state of the economy of the respective states and cities is going to drive that. There are some rust-built markets here in the Midwest that are going to have a hard time enjoying that renovation and development capital. But we know that Texas and Florida and California are the exception of the rule and they seem to be booming along in pretty good order. So it's going to be on a state-by-state city, zip code, zip code, evaluation. Well, as we talk about commercial real estate, you're obviously an expert in it. You've been doing it your whole life and you understand everything about commercial real estate. We'll also have flagger. But a big part of commercial real estate in the United States are the people who truly are experts like yourself.

14:48Members of the CCIM, the Certified Commercial Investment Member Institute. Now, can we pause for a moment and hear what the CCIM is, why it's in existence, and what it means? Well, the CCIM Institute is the graduate school at commercial real estate. We're about 9,000 members stronger around the United States and then the handful of countries overseas. In order to get a designation as a CCIM member, you've got to take four core courses. You've got to submit a resume of experience that makes up a certain dollar value that you can be graded and establish the fact that you can operate at a high professional level. Sit down and take a one-day examination with that information in mind. And we'll have three exams that we administer a year, probably 250 to 300 people sitting for them.

15:50And the past rate on that is 85 or 90 percent. So not everybody's a rubber stamp I'm getting on. The recognition as a CCIM does indeed. But if you were interested as a consumer in buying some very big commercial properties, you would want a member of the CCIM. You don't just want a good, say, residential realtor. Well, it's the same thing as repairing your car. You probably not going to a shop that opened last year if there's one that's been there for a few years and you've heard good things about. That's the reason you go to the CCIM Institute to a member, somebody with a track record who knows the market and can help you make good decisions about where to invest your capital. And Bill, I remember back when I was a realtor and boy, the members of the CCIM, that was like looking up at Mount Olympus. You all were the best of the best and understood everything involved in really big commercial real estate.

16:55So I salute you, my friend. Well, we appreciate that. The initial course for CCIM study, the 101 course is equated by many people that step into the room for the first time as drinking from a fire hose. There's a lot of information that comes your way. And you got to work at it. That's great. Well, Bill, one more point I'd like to raise. You are not just an expert in commercial real estate and of course a member of the CCIM. You're also deeply involved in your community. And one of the biggest projects happening in your community, one of the biggest things in Michigan is the Mackinac Bridge Authority. Tell us about that and why it's so important this Labor Day weekend. Well, first of all, the Mackinac Bridge is five miles long. It's a suspension bridge. It connects Michigan's two peninsula's. Mackinac City on the south and St. Ignis on the north built in 1957.

17:57It carries about four million vehicles a year back and forth between the two peninsula's. And every Labor Day, ever since the bridge is opened, the governor of Michigan has ordered the bridge closed. So that pedestrians can cross the bridge as a recreation and activity on Labor Day. So on Labor Day morning, you'll find me at the Mackinac Bridge, preparing to cross the bridge just as this unrizes, along with 35,000 other people from Michigan and surrounding states who make this a ritual for their Labor Day. That is wonderful. And do you go all the way across and then all the way back to? Well, we used to have shuttles. It's evolved over the years. And there used to be two lanes of traffic and two lanes of pedestrians. Now for security considerations, it's all pedestrian. The bridge is closed entirely from 6am until noon. And you've got your choice.

18:57You can walk halfway across the bridge and back to the city you started from. And thus the five mile walk you can do it both ways and have a 10 mile walk. Or if you've got a big family, you can deploy a car on each end and decide just how you want to do it. But it's a ritual that some people have patches on their sleeves that know all the different bridge walks that they've done. And some people have done 10 or 20 of them. It's quite a ritual. Bill, this sounds like tons of fun. And I hope that on Labor Day you have beautiful weather for the 2026 walk across the Mackinac Bridge. We all have our fingers crossed, but we'll be there for rain or shine. And Bill, I really want to thank you for joining us on this show today and talking with us about commercial real estate, empty office buildings and what might happen to them, and also the importance of the CCIM. Bill, thank you for being on real estate this week.

19:58Good to be a part of it, Simon. Thank you. You're very welcome. Bill Millican, real tour and broker owner of Millican Realty in Ann Arbor, Michigan, the former president of both the Michigan Real Tours and the commercial board of real tours in Michigan. Bill also served as a regional vice president at NAR and was chair of its commercial committee. And currently, Bill is one of seven members of Michigan's Mackinac Bridge Authority. You're listening to Real Estate this week with Stephen Gasquay. A big change is happening in the American home, a change that makes so many things better, your sleep, your work, even your commute and your next flight. This change comes from the best noise-canceling earbuds I have ever used, the FitNexa Somnipods 3.

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22:19The idea is very attractive to many investors, since there's a chance you could make big money. In some cases, bigger money than a year-long rental could provide. But, there are challenges too. So, before you buy, do your homework. Know the rules about what's allowed, what's not allowed, and also whether any proposed laws about rentals might affect you. Also, make sure you know the tax situation where you plan to buy. That big income might be chipped away by state, local, and federal taxes, because after all, that rent is taxable income. Okay, but say you do the homework and understand the rules, and you go for it. Congratulations, a very exciting move. So let's get it all set up. Now, before you register the property on Airbnb, VRBO, or some other site, get it all ready. And right away, make sure your insurance company has written the right policy for short-term rentals. A regular homeowner's policy probably won't cut it.

23:31Next, put a smart lock on the door. Keys are so... 1990s. Smart locks are the way to go, and we'll have more on that in just a couple of minutes. Next, make sure everything is working perfectly. The AC and the heat, the appliances, the hot and cold water, the grill, and the internet if you plan to provide that. Then make sure the instructions and the passwords are crystal clear and easy to locate. Then make sure to stock up the place, bath towels, several sets of sheets, paper towels, T.P., pots and pans, cooking tools, and more. It's so important to stock it up right. I'll never forget the time I rented an Airbnb which had a very nice gas grill, but the only spatula in the place was made of plastic. That's not going to work on a barbecue grill. And then locate a good reliable cleaning service, one that works weekends, and that brings us to the next job, creating the schedule.

24:39When one tenant arrives, and when they leave. And then time for the cleaning crew to come in and get the place ready for the next tenant, and the cycle then repeats itself. And this brings us back to the smart locks. If you have a smart lock on the door, you don't really have to be there to deliver the keys. Just go online and give each tenant a unique code. And many short term rental owners use the last four digits of the tenant's phone number, so they'll never forget it. Now once their time is up, cancel that code. And then the cleaning crew uses their own code and so on. It works like a charm. So with all that work done, take beautiful photos, pick an online rental site, and go for it. You'll have a new revenue stream as you generate income, and hopefully a lot of income. And you'll learn so much about what works and what doesn't.

25:40How to keep the place filled, how to avoid vacancies, and much more. And for every short term rental you get, I wish you five stars every time. Next time on Real Estate this week, down payment assistance. Did you know that thousands of dollars might be available to help you buy a home? That's next on Real Estate this week. And until then, I'm Stephen Gasquick, and thank you for listening to us. A brand new episode of Real Estate this week with Stephen Gasquick drops every weekend, every week, and you're invited to listen, subscribe, and follow us. Just look for Real Estate this week with Stephen Gasquick. The best Real Estate strategies out there, just for you.