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The Office Apocalypse
Posted at: Dec/15/2022 : Posted by: Mel
Related Category: People, Society, Watching America,
It’s interesting how things change. Before the pandemic, roughly 95% of all big city offices were occupied according to the National Chamber of Commerce. Today (December 2022) that number is closer to 47% (Bloomberg News). Employees and employers are not returning to their previous downtown offices. This downtown exodus has had a domino effect, less foot traffic, less public-transit use, the shuttering of many support businesses, especially restaurants. Even with most pandemic worries behind us, downtown business districts seem more like ghost towns and less like centers for commerce.
Not unlike how deindustrialization led to abandoned factories and warehouses, the pandemic has led downtowns into a new period of transition. In the 1920s factories were replaced by gleaming commercial high-rises occupied by white-collar workers, but it's not clear yet what today's empty skyscrapers will become. What is clear is that an office-centric downtown is soon to be a thing of the past. With demand for housing in cities skyrocketing, the most obvious next step would be to turn empty offices into apartments and condos. But the push to convert underutilized office space into housing has been sluggish.
Without more-robust policies to address failing downtowns, cities are going to start hurting. Even small declines in foot traffic and real-estate use compounding over time will lead to reduced tax revenue and sales receipts for small businesses, ultimately affecting city budgets. While city planners are reimagining downtowns, the impact on cities' bottom lines via tax revenues has been devastating. A report by the National Bureau of Economic Research indicates office utilization will remain at least 35-39% below pre-Pandemic levels.
Historically, it is not unusual for business behavior to shift significantly around or following a major event. When the towers were destroyed in New York, business air travel was initially curtailed almost entirely out of fear of flying. But businesses still needed their meetings and other technologies were adopted as an alternative. With the passage of time business travel recovered, but not to pre- 9/11 levels because many businesses found that audio and video conferences were sufficient to meet the challenge while also reducing costs. Returning to an on-premises work situation may prove to be similar 20 years later. Telework and hybrid work situations can cost less and give employers more flexibility with their workforce.
With all these forces at working against a traditional urban cores, their related planners are potentially facing a crisis of “what next”. While the throngs of people crowding into a bus on a Monday morning may be an apparition of the past, declining tax revenues are very real. Concurrently, the related economic challenges of the pandemic has led to increases in homelessness, crime and a general reduction in the quality of life near city business centers. What all that really means is that the revenue to manage city challenges is declining, the social challenges in those same city cores areas where the homeless population has increasingly taken root during the pandemic. For many people the prospect of wading through the tent camps and related paraphernalia has made a return to downtown even less desirable.
The devastation of downtown commercial districts has made an unmistakable shift in America's largest cities. In San Francisco, the landmark Salesforce tower and other buildings (Business Insider) have remained mostly unoccupied as the tech industry has embraced remote and hybrid work. In New York, Meta recently terminated its lease agreement for three offices totaling 450,000 square feet in Hudson Yards and on Park Avenue, this represented a significant short-term loss for Meta and a tax loss for NYC. This tracks with trends: San Francisco is faced office-vacancy rates of 34% to 40% (SF Chronicle) in some parts of the city, while in New York about 50% of workers are back in the office.
Even in cities where more workers have returned, like Austin or Dallas, occupancy rates are still only 60% of what they were pre-pandemic. These shifts follow the unassailable fact that remote work appears to be here to stay.
The increased cancellations of office leases have cratered the office real-estate market. It estimated that $453 billion in real-estate value would be lost across US cities, with a 17-percentage-point decline in lease revenue from January 2020 to May 2022. The shock to real-estate valuations has been sharp: One building in San Francisco's Mission District that sold for $397 million in 2019 is currently on the market for about $155 million, a 60% decline.
The second-order effects of remote work and the commercial real-estate apocalypse is still playing out, but it isn't looking good for traditional downtown business districts. Declines in real-estate valuations lead to lower property taxes, which affects the revenue collected to foot the bill for all forms of city budgeted services. The National League of Cities suggested cities should expect at least a 2.5% decline in sales-tax receipts and a 4% decline in revenue for fiscal 2022.
City leaders are beginning to accept this impending new reality. At a recent conference, the mayor of Seattle, Bruce Harrell, expressed concern about tax revenue. "The fact of the matter is there will never be the good ol' days where everyone's downtown working," he said. London Breed, San Francisco's mayor, told Bloomberg News that "life as we knew it before the pandemic is not going to go back." In the event of a recession, things could get much worse.
What about conversion?
While the demand for commercial real estate is declining, the demand for residential real estate has gone into overdrive. Some of this new demand is population growth, but some studies suggest the growth is also spurred by the remote workforce. Remote workers are looking for new spaces that can accommodate their private lives and a desk or office for their work challenges. Obviously, the more time you spend at home, the more you want to separate personal life from work life. This demand for additional space is contributing to home and housing costs increasing well beyond inflation.
The solution might appear obvious: Convert commercial spaces like offices into housing. Empty offices can become apartments to ease housing pressure while also bringing more people back to downtown areas. But very few buildings have been converted, and the rate of conversion projects from 2016 to the present has not increased.
So what's going on? Simply: The costs to convert are often hard for developers to justify. Construction costs are assessed on a building-by-building basis and need to take into account structural issues such as floor layouts, plumbing, and window access. Residential buildings also have to accommodate shared spaces like hallways, meaning they generally have less rentable space than an office building. Additionally, the office-to-residential conversion must go through all the rezoning hurdles imposed by local communities which may be a resource-draining path which many developers don’t want to risk their time on. Clearly, there is a need to revisit how rezoning and changes to land-use planning are vetted and approved.
Changing how we think about cities
Overall, combating the death of downtowns requires a reworking of how we think about cities and the value they provide. "Downtown Is for People," that "there is no logic that can be superimposed on the city; people make it, and it is to them, not buildings, that we must fit our plans." (Jane Jacobs, 1958)
While the central business district characterized downtowns in the 20th century, the latest revitalization of cities may hinge on social value. Remote work has isolated people, and central social districts offering living, dining, retail and community hubs may be the new model for cities. Dense downtowns in Austin and New York have seen steep increases in rental demand, a sign that people continue to be willing to pay a premium to live in a social district where everything they need is in easy walking or public transportation range. Unfortunately, very few urban areas have evolved to this in any significant scale.
The corporatization of work led to urbanization, but the trend today is a de-corporatization of downtowns and de-centralization of the white-collar workforce. What’s next for our urban centers is the question. Do downtown streets and sidewalks become tent camps where people live in the shadow of once great buildings? Do we convert existing steel and glass into residential and community businesses? Do we tear down the skyscrapers of the 20th century to create social districts for the 21st century? There are obviously more questions than there are answers, but it does seem that change is inevitable.
The economic health of cities is intrinsically linked to how space is used or unused, and right now downtowns are undergoing a massive shift. Despite the sluggish movement, it's in cities' best interest to figure out how to quickly convert office-centric downtowns into something more suitable for the next generation of how people will work and live.
The decline in office work as a result of the pressures from the recent pandemic has left giant skyscrapers with huge vacancies and a limited expectation that those workers will return. The result has been closed businesses loss of revenue, taxes and supporting jobs. Concurrently, homelessness has increased and moved to these same central business districts where more services are available. Traditionally, restoring or maintaining the vibrancy of a city’s downtown has always been high on the agenda of our civic leader. Traditional solutions of fiscal incentives for business or non-traditional approaches like building conversions don’t seem viable this time.
It will be interesting to see what is next for our city-centers, or maybe gleaming glass towers of office space competing for sunlight have outlived their time?