Summary: This post explains the meaning of zombie properties in commercial real estate, how it differs from vacancies, four types of zombie properties, and examples of adaptive reuse in eight major U.S. cities.
Since Covid-19, it’s been difficult to fill up space within commercial real estate. Of course, quarantine isn’t still in effect, but it’s had a lasting impact on the way we work. In particular, demand for commercial spaces, especially offices, has been down.
The NAIOP (Commercial Real Estate Development Association), predicts that demand for office space will continue to shrink through early 2025. They base their forecast on negative net absorption in 2024 (totaling approximately 13.4 million square feet), which means, for those new to CRE, that more commercial space was vacated nationwide than was leased or “absorbed.”
This has contributed to properties that have a lot of vacancies being nicknamed “zombie properties.”
A zombie property is one that the owner has defaulted on and is no longer taking care of — they’re found in both residential and commercial markets. Properties that have 50% or more available space empty without anyone leasing are at risk of becoming zombie properties. It’s a zombie property because it’s either still in the name of an owner that’s abandoned it or the bank, city, or lender technically owns the property but has no interest in taking care of the property.
And so, this unused property decays and falls into disrepair as it sits empty.
So why is this still going on?
High interest rates make it more difficult for property owners to be financially successful, leading to more defaults
A shift toward remote work over office spaces has lowered overhead expenses for many companies
Businesses performing the majority of their business online rather than a brick and mortar
Short-term leases have been offered over longer, 5 to 10 year long leases
Economic uncertainty, and consumer concerns over inflation
Zombie Properties vs. Vacant CRE
Zombie = abandoned (and usually neglected)
The meaning of zombie property does not necessarily refer to a vacant or under-utilized property. Some properties may have a lot of empty spaces but are maintained and used by a few renters. These properties are under-utilized, not zombies. Also, not every zombie property has experienced a foreclosure. The owner may have abandoned the property before the foreclosure and still be technically responsible for the property.
And so, tracking down these undead properties isn’t easy. Several cities do have statistics on commercial foreclosures, but there isn’t as much data on what percentage of properties are sitting empty. And so, some zombie properties may experience commercial foreclosures but not all commercial foreclosures are necessarily zombie properties.
ATTOM data suggests that California, Texas, New York, and New Jersey were the states with the highest number of commercial foreclosures in June 2024. This report also found that the U.S. started to see an upward trend in commercial foreclosures since June 2020.
Vacant = not leased, unoccupied
The important distinction is that a zombie property is not always a vacant property. Some cities have vacant properties that haven’t fallen into disrepair or are mostly vacant with a few tenants still renting out spaces.
Vacant commercial real estate is still most likely losing money and are at risk for foreclosure, resulting in a zombie property.
NASDAQ insights had gathered a list of the top U.S. cities with the highest percentage of empty office buildings. These include:
Chicago: 15.1%
Phoenix: 15%
Denver: 14.6%
Los Angeles: 14.4%
Types of Zombie Properties in Commercial Real Estate
Empty office buildings
Office buildings are among the most common types of commercial real estate as companies move toward remote work over traditional in-office work. This has significantly decreased the demand for office spaces, especially those that aren’t in attractive locations with a lot of nearby amenities.
Los Angeles alone has 51 million, or 24% of the total, square feet of vacant office space, according to the Orange County Register. Avison Young research found that Phoenix, Arizona’s office vacancy is also high, especially among buildings with over 50,000 square feet.
Zombie malls
The increase in mall vacancies predates COVID-19. Malls were once the premiere location for local shopping, having been responsible for edging out locally owned businesses. Then, the e-commerce transition towards digital and online sales hurt malls and many have become vacant, abandoned, or outright dead. Recent events such as the global pandemic exacerbated this issue, resulting in more and more abandoned, empty malls.
Number of enclosed shopping malls in the U.S., according to research compiled by First Coast News:
1980s: 2,500+
2000: 2,076
2024: 700
2030 prediction: 150
According to Capital One Shopping research, today as much as 87% of large shopping malls may close over the next 10 years. Additionally, the same research found that mall vacancy rate is 110% higher than overall average retail vacancy rate.
Zombie factories
Abandoned factory buildings have been around since manufacturing has moved outside the U.S. Abandoned factories and larger buildings are a particular eyesore for local communities as they’re large, sometimes dangerous, and often sit empty for decades. Additionally, abandoned factories are difficult, and expensive, to fix up or remodel into an alternatively useful space (such as for retail, mixed-use or office space). Even demolishing them will incur significant costs, especially if it involves environmental remediation.
Abandoned entertainment centers
One of the rarer, but sensational, types of abandoned CRE is entertainment centers. Amusement parks and entertainment centers are abandoned when they’re determined to be not financially viable to maintain. An infamous example is the Six Flags New Orleans, which was damaged by Hurricane Katrina in 2005. Being too expensive to demolish, the park sits empty and abandoned.
Examples of Zombie Revitalization in US Cities
Once a property is a zombie, it’s not always popular to revive it for the same purpose that it was formerly abandoned for. Oftentimes, the abandonment is a result of an issue with the property that needs to be corrected if it’s to be used again in the future.
A common step that many cities have taken has been the “adaptive reuse” of abandoned, zombie properties. This is when a city puts some funding aside to convert an abandoned space to a new purpose. This is often housing, as office spaces have a natural similarity to apartments. Adaptive reuse has certain tax benefits but are, notably, not preservation projects for historic sites.
Learn more about adaptive reuse, its benefits, challenges, and some common examples.
Detroit
Detroit has lost much of its old manufacturing activity and, as a result, has many historic buildings that sit empty. Detroit’s adaptive reuse efforts have revitalized both old residential districts and abandoned commercial real estate.
A famous standout that was recently completed was the reopening of Michigan Central Station, a former train station that was first constructed in 1913. Ford Motor Company purchased it in 2018 for the eventual conversion to a mobility technology innovation station. Although it was a large effort, it now hosts 600 employees across 100 different startups.
Michigan Central Station in 2017 ID 97326836 | Michigan Central Station | Patrick Cooper | Dreamstime.com
Michigan Central Station today ID 329511941 | Michigan Central Station | Wirestock | Dreamstime.com
St. Louis
The city of St. Louis has also been home to many adaptive reuse projects such as Woodward Lofts The Grove, a 250,000-square-foot factory that was converted to a loft apartment complex that preserves some of the classic factory style of the early 20th century. This includes some original brickwork, the factory roof, and even bits of old machinery.
Tampa
Tampa, Florida, is also home to several empty office buildings that have had adaptive reuse. One such adaptive reuse project was the Aloft Tampa Downtown, a hotel that was originally a bank before it was converted to an office complex. The offices sat empty for almost 10 years before it was purchased and revitalized into a beautiful downtown Aloft hotel.
Houston
The city of Houston’s famous adaptive reuse program is POST, which originally was the Houston Grand Central Station and then a post office. The building was reopened in 1984 as a post office, but once again decommissioned in 2015. Today, it’s been redesigned as part of an adaptive reuse program to be a commercial hub that would be home to shops, art, theater performances, and more.
Seattle
Seattle’s adaptive reuse program is focused on sustainability and creating environmentally friendly, energy-efficient new projects. The 400 Westlake project was originally constructed in 1930 for Firestone Tire and, today, is commerce space that’s constructed with salvaged and repurposed materials. Today, it’s a Class A office space that’s also highly environmentally conscious.
Anaheim
Anaheim’s adaptive reuse program focuses on revitalizing older spaces into affordable housing to combat the homelessness problem that the local community experiences. One such project was the adaptive reuse of old models into supportive housing. This involved converting the Econo Lodge, near the Disneyland Resort, into the Buena Esperanza, a series of two-story apartments for people exiting homelessness.
Tucson
The Presidio Palms in Tucson, Arizona, was originally built in the 1960s as a hotel near the downtown city center. This highly desirable location was converted to an apartment complex that features studio and one-bedroom apartments with extensive community amenities.
Minneapolis
In Minneapolis, the 700 Central project is not only an adaptive reuse, but a preservation, of a historic building from the early 20th century. This historical site was originally a series of brick warehouses reinforced with concrete and timber. This unique, classic look was preserved as the buildings were converted into 80 apartments that were designed around the building’s architecture.
McGhiever, CC BY-SA 4.0, via Wikimedia Commons
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Main illustration credit: ID 314369716 | Oksana Ermak | Dreamstime.com
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