Obsolescence Equals Opportunity_final (002)

As established in Chapter 1, the U.S. economy will require 4.6 bsf of office space to house all of its office workers even if they are only going to the office some of the time. The office market is over-supplied in general, but the amount of highly desirable office space does not meet current or future demand. As such, the market is trifurcated into three categories 1) the “Top” most attractive space, 2) the “Middle” quality commodity product that will do well enough, and 3) the “Bottom” excess space that will need to be renovated or repurposed in the coming decade. The representative shares of these categories are featured in Chart 4. The Top: Demand has been relatively targeted towards the cream of the crop, as 100 msf of positive absorption recorded since 2020 has occurred in just 9% of existing office stock (during a period when the office market in the aggregate witnessed negative net absorption). Taking into account construction underway and new projects expected to be delivered in this decade, approximately 15% of office inventory will qualify as highly desirable. The best, most

experiential, quality space will receive the highest premiums and attract attention from the strongest occupier brands. Middle (Quality Commodity and everything else): The Middle, which is an operationally serviceable portion of stock, accounts for approximately 60% of total inventory and is further classified into three groups: • Good Enough: Space that is considered ‘good enough,’ and will be able to capture some demand without significant investment. This group does not represent the highest-quality office product, yet it will not need significant investment to compete for some amount of office demand over the next 5-7 years. This group will not receive the premiums commanded by the top office product, but it also will not face 20%+ vacancy rates as experienced in lower-tier product. • Value Play: Represents space that will capture leasing activity given its relatively competitive and cost-effective optionality, attractive to certain cost-sensitive tenants. This group will not require an upgrade because its target

CHART 4: SEGMENTING FUTURE RISK BY SPACE SEGMENT Defining the Top, Middle and Bottom Office Tiers

Total O ce Inventory by Tier, msf

Top A fraction of total inventory garnering a premium over all the rest Middle Good Enough Commodity space that will continue to compete Middle Value Play Attractive to cost-conscious occupiers Middle Needs Upgrading/Repurposing Requires some form of upgrade or improvement in the next decade to compete Bottom Older, functionally obsolete, high-vacancy, excess space that will require some form of repositioning or repurposing strategy

6,000

15% 850 msf

5,000

24% 1,360 msf

4,000

Middle

15% 850 msf

3,000

Millions

2,000

21% 1,190 msf

1,000

25% 1,400 msf

0

Total Inventory

Source: Cushman & Wakefield Research

14 | OBSOLESCENCE EQUALS OPPORTUNITY