Office Investing Today: State of the Market with Jesse Fragale

How is the office real estate market truly faring amidst predictions of its demise in the post-pandemic landscape?

Many have foretold the death of office real estate, citing remote work trends and vacant downtown buildings as proof. But is the office market really in as dire straits as some claim?

In this episode, commercial broker Jesse Fragale provides an insider’s perspective. With over a decade of experience in office leasing and sales, Jesse shares updates from major markets, unpacks differences between Class A, B, and C spaces, and examines the feasibility of converting offices into apartments. He explains why reports of the office market’s death may be greatly exaggerated, especially for higher-quality assets, and reveals where pockets of opportunity still await savvy investors willing to hunt for them.

Jesse is a commercial real estate advisor specializing in the Downtown and Midtown Toronto markets. Jesse represents clients in various areas including tech, start-ups, not-for-profit, and traditional corporates to name a few. His focus is on office leasing and investment sales.

(00:03:00 – 00:06:00) Perceived Crisis vs. Pre-Existing Trends

• The rise of remote work did not surprise most commercial brokers, as more flexible workplace norms were already emerging
• Pandemic lockdowns rapidly accelerated these pre-existing shifts towards more hybrid remote/in-office arrangements
• Initial overreactions are now giving way to market corrections, but the eventual “new normal” remains unclear

(00:06:00 – 00:09:00) Flight to Quality?

• Many employees still value separating work and personal lives, favoring offices for camaraderie & productivity
• High-quality “Class A” office spaces may benefit from a “flight to experience,” attracting tenants through amenities and modern finishes
• Class B and C buildings face more uncertainty, especially in struggling locations

(00:09:00 – 00:12:00) The Challenges of Converting Offices to Apartments

• Limited windows and expansive floor plates make most offices poor apartment candidates
• Upgrading plumbing, HVAC and other systems would often prove cost-prohibitive
• Pure conversion is rare; demolition and ground-up building more likely

(00:12:00 – 00:16:00) Sales Volumes and Rental Rates

• Office sales slowed dramatically – potentially more than the multifamily market
• Landlords favored short lease extensions amid uncertainty
• Effective rents dropped as landlords offered more concessions

(00:16:00 – 00:28:00) Signs of Stabilization

• Companies are returning to 3-5+ year office leases, signaling renewed optimism
• Rental rates are flattening after years of concessions and deferrals
• Proximity to transit is now prized more with location preferences shifting
• Book recommendation: The Motivation Myth by Jeff Haden
• Who inspires Jesse?: Jesse’s grandfather

Quotes:

“I don’t think there’s an exact, textbook definition, but the way I categorize AAA office is, if you’re in most major markets, you see buildings with LEED Gold, Platinum certification, or DELOS wellness certification – those top-tier, cutting edge buildings with great amenities.” – Jesse Fragale

“The challenging situations we see are investors who purchased an office building within the last 5 years when rates were low. Now their building has high vacancy in a weak location, and they can’t fill the space. Those owners are in trouble.” – Jesse Fragale

Connect with Jesse:

Website: www.avisonyoung.com

Apply to Invest with Taylor at www.investwithtaylor.com

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