Four years after the onset of the COVID-19 pandemic, its effects are still felt in the construction and real estate sectors in the United States. Accelerated remote work and hybrid schedules are leading to a sharp decline in demand for traditional office space in cities across America. In major metros like New York and San Francisco, occupancy rates have dropped, property values have diminished and rents have fallen significantly. As architects design for the future of work, the real estate market faces divided perspectives on whether to invest in the country's growing inventory of vacant office buildings.
Cities across the United States are experiencing some negative effects of the work-from-home era. As people migrate to the suburbs in search of affordable living conditions, the value and occupancy rates of downtown office buildings continue to decline. According to a report by McKinsey, rental prices for office spaces in New York City fell by 18% between 2019 and 2022. In San Francisco, rents decreased by 28% over the same period. On the contrary, office properties in Atlanta saw their dollar value increase by 31% from 2019 to 2022, bucking the larger trend.
The typical structure of commercial office leases has aggravated the challenges facing building owners. Lease terms in the commercial real estate sector tend to be quite long, often 10 years or more, which previously provided owners with a steady revenue stream. However, as fewer employees make the commute into central business districts, many corporate tenants are rethinking the need for large leased footprints. Some companies may opt to negotiate shorter lease renewals when their current terms expire, while others have already terminated their long-standing agreements altogether. If occupancy rates fail to return to pre-pandemic levels, converting office buildings into alternative uses may be the only solution for these structures.
Related Article
Transforming Vacant Offices Into Dynamic Mixed-Use Hubs: Solutions for Unoccupied Buildings in U.S. DowntownsMany experts compare the predicament of office buildings to that of shopping malls in the early 2000s when e-commerce first took off. The time of the dot com crash saw malls being repurposed into non-traditional uses like police stations, indoor farms, and cricket stadiums. The 2008 economic crisis provided cities with a similar chance to repurpose distressed assets after the housing crash, however, this opportunity was not capitalized on. Instead, most foreclosed properties were acquired by investors, and then flipped or rented at high rates without regard for community needs. As American cities navigate contemporary economic complexities, the public sector has a chance to be proactive and directly invest in transforming vacant offices themselves.
Despite these challenges, there is a newfound interest in distressed real estate among investors. Recognizing the stability of urban centers post-pandemic, experienced investors are capitalizing on discounted properties. For the public sector, massive commercial vacancies in cities present both a challenge and an opportunity. Local governments are exploring strategies to incentivize the conversion of office spaces into residential or mixed-use developments. Initiatives such as tax abatements and low-interest loans aim to attract developers and stimulate urban revitalization.
Author of The New Urban Order, Diana Lind notes "as commercial properties fall into foreclosure in 2024, cities could take steps to better shape the city they want in the future by actually investing in those properties themselves". Reflecting on missed opportunities during the 2008 economic crisis, where cities stood on the sidelines as investors seized foreclosed properties, there is a growing realization of the need for proactive urban planning. By investing in distressed commercial buildings, cities can foster inclusive development.
There are convincing reasons for the public sector to buy and repurpose properties. Cities can use repurposed offices to jumpstart innovation districts - clusters of research institutions, startups, and business accelerators. Concentrating knowledge activities downtown can drive economic growth and attract skilled talent. Keeping commercial property public means steering rents and amenities toward inclusive growth rather than maximum profit extraction. Acquiring vacant offices near public transit could also allow the development of affordable housing in prime locations. Buildings could also be converted into recreation centers, libraries, startup incubators, and other amenities that bring value.
Ultimately, the mass shift to remote work has emptied offices and damaged city budgets and downtown vitality. However, the vacancy and uncertainties around the future of commercial real estate bring hidden opportunities. Cities that strategically invest in converting offices can promote equity, stimulate innovation, and shape urban landscapes for the future. With foresight and vision, the fallout from the “work from home” era can be turned into stronger, more resilient cities.
