Even though quarantine measures are long gone, there’s no doubt that the pandemic has permanently altered the CRE landscape. The way we work has changed — and that has substantially diminished office space demand. The NAIOP predicts that office space demand will keep shrinking through early 2025. In fact, they forecast that 2024 will see a negative net absorption of 13.4 million square feet, meaning more commercial space will be vacated than leased. This ongoing vacancy problem has led to a rise in “zombie properties.”
What does the term “zombie property” mean in CRE?
Zombie CRE properties are abandoned and neglected spaces that have been left to decay. In commercial real estate, these properties are often ones where the owner has defaulted and walked away, leaving the building to fall apart. These are CRE properties with at least 50% of their space unleased. They’re not just empty — they’re stuck in limbo, either in the hands of a bank or lender that doesn’t want to deal with them or an owner who has completely abandoned them. These “undead” properties slowly deteriorate over time because no one is taking care of them.
Why is there a rise in the number of zombie CRE properties?
- High interest rates – The increasing cost of financing is squeezing property owners and making it harder to stay profitable. Defaults are climbing, leaving properties abandoned.
- The remote work shift – More companies now allow their employees to work from home. This leaves a lot of commercial space sitting empty and unable to generate the returns that owners need.
- Online businesses booming – With more businesses going digital, the need for brick-and-mortar offices continues to decline. This trend accelerates office vacancies.
- Short-term leases becoming the norm – The move away from long-term, 5- to 10-year leases to shorter leases makes it harder for property owners to secure long-term tenants. This instability increases vacancy risks. Inflation concerns and general economic instability also create hesitation in leasing decisions.
How are “zombie” properties different from “vacant” CRE properties?
It’s important to distinguish between zombie properties and vacant spaces. Here’s the difference:
- Zombie properties are abandoned properties that are decaying due to neglect. The owner has either walked away or defaulted, and the bank or lender has no interest in maintaining it. These properties can sit for months or even years without any action being taken.
- Vacant commercial real estate properties are empty but may still be well-maintained. They might have some tenants occupying parts of the space, but overall, they are not fully leased. A vacant property is still losing money, but it isn’t neglected like a zombie property.
Note that vacant properties are at risk, too. They could slide into foreclosure and become zombie properties if they remain empty long enough.
What are the types of zombie CRE properties?
- Zombie malls – Once the crown jewel of local shopping, malls have been steadily losing ground to e-commerce even before the pandemic, and the shift to online shopping has accelerated their downfall. The global pandemic only made matters worse, leading to more malls sitting vacant, abandoned, or completely dead.
The numbers don’t lie: In the 1980s, there were more than 2,500 enclosed shopping malls in the US. By 2000, that number had dropped to 2,076, and by 2024, it’s expected to be just 700. Projections suggest that by 2030, that number could shrink to 150.
Mall vacancy rates are now 110% higher than the overall average retail vacancy rate, and up to 87% of large shopping malls may close in the next decade. With the rise of e-commerce and changing consumer habits, many malls are becoming a shadow of their former selves.
- Zombie factories – Abandoned factories are a familiar sight in many communities especially as manufacturing has moved outside the US. These large and often dangerous buildings can sit vacant for decades and create eyesores in local neighborhoods. Factories that were once vital to the economy are now costly to renovate or repurpose into alternative spaces.
Even tearing down these factories can incur substantial costs (particularly if environmental remediation is required). Many of these properties simply sit empty and neglected as a result, making them vulnerable to further deterioration. They may also become burdens on the communities where they’re located because they may become magnets for crime.
- Empty office buildings – Office buildings have long been staples of CRE portfolios, but the shift toward remote work has left many of them vulnerable. As businesses transition away from traditional in-office setups, the demand for office spaces has dropped —especially for properties located in less desirable areas without easy access to amenities.
Take Los Angeles, for example, where 51 million square feet of office space — or a whopping 24% of the total market — sits vacant, according to the Orange County Register. Phoenix, Arizona also faces a high office vacancy rate, particularly in buildings over 50,000 square feet.
- Abandoned entertainment centers – Though less common, entertainment centers such as amusement parks are sometimes abandoned when they become too expensive to maintain. Their size, the cost of maintenance, and the complexity of repurposing them for other uses make these properties particularly difficult to manage and resell. Take a look at Six Flags New Orleans — after Hurricane Katrina damaged it in 2005, it became too costly to demolish and now sits empty and abandoned.
Can zombie properties still be revitalized?
Once a property becomes a zombie, it’s not always practical or desirable to revive it for the same purpose it was originally intended for. That said, cities across the US have found creative solutions to repurpose abandoned spaces through a process called “adaptive reuse.”
Adaptive reuse converts a vacant or underutilized building into a new and viable space, often for residential or commercial purposes. The goal is to breathe new life into these CRE properties without tearing them down completely. This approach provides certain tax incentives and benefits but differs from historical preservation (as it’s not focused on restoring the property to its original form).
700 Central project in Minneapolis
Originally a series of brick warehouses from the early 20th century, this building was converted into 80 apartments. The project preserved the unique architecture of the original structure (including the concrete and timber reinforcements) while creating modern living spaces.
Woodward Lofts in The Grove in St. Louis
This 250,000-square-foot former factory was transformed into a loft apartment complex while preserving much of the factory’s early 20th-century style, including original brickwork, the factory roof, and even pieces of old machinery. This adaptive reuse provided much-needed residential space in the heart of the city.
Aloft Tampa Downtown in Tampa
Originally a bank, this building was repurposed into an office complex but remained largely vacant for nearly a decade before being revitalized into a beautiful downtown hotel.
Michigan Central Station in Detroit
Detroit was once known for its booming manufacturing sector, but as you know, it now faces many abandoned historic buildings due to the loss of that industry. Thankfully, the city has embraced adaptive reuse to revitalize its historic districts and bring new life to CRE properties. One of the best examples is the Michigan Central Station. After sitting vacant for years, Ford Motor Company purchased the building in 2018 with plans to convert it into a mobility technology innovation hub. The station now hosts 600 employees working across 100 startups.
POST Project in Houston
Originally the Houston Grand Central Station, this iconic building became a post office before being decommissioned in 2015. It was later reimagined as a mixed-use commercial hub. Today, POST houses shops, art spaces, theaters, and more, making it a vibrant part of the city’s landscape.
400 Westlake in Seattle
Built in 1930 as a Firestone Tire building, the structure is now a Class A office space. This renovation focused on using salvaged and repurposed materials and turning the building into a model of energy efficiency and environmental responsibility.
Buena Esperanza in Anaheim
Adaptive reuse projects in Anaheim tend to focus on converting older buildings into affordable housing to address the growing housing insecurity. One notable example is the conversion of the Econo Lodge (located near the Disneyland Resort) into Buena Esperanza, which provides two-story apartments for individuals transitioning out of homelessness.
Presidio Palms in Tucson
Originally a hotel built in the 1960s, this downtown CRE property was converted into an apartment complex that now offers studio and one-bedroom apartments, complete with a range of community amenities.
Can you get CRE funding for zombie properties?
Yes, it’s possible to CRE funding for zombie properties — but it’s a bit more complicated than financing traditional commercial real estate. Expect banks to be more cautious due to the higher risks involved. If you have a CRE zombie that you are interested in revitalizing, explore alternatives like hard money and bridge financing, depending on the condition of the property and your specific goals.
Since zombie CRE properties often require significant repairs or renovations, hard money loans are a good fit because they can cover both the acquisition and renovation costs.
Bridge financing can also be useful if you intend to renovate or reposition the property but need quick access to capital. It allows you to purchase or refinance the CRE property and complete the necessary repairs or improvements before securing more permanent financing (such as a traditional commercial mortgage or a more long-term loan).
In either case, private commercial real estate lenders will want to see your plan for revitalizing the property and improving its value.
Do you have a CRE project that needs agile funding? Talk to our team here at Private Capital Investors. We can help you secure CRE financing even for more complicated projects that traditional banks usually don’t fund.
