Telework traversing downtown, will cost cities $453 billion

Downtowns have been haunting American cities since the start of the pandemic.

before the epidemic, 95% from offices occupied. Today the figure closer to 47%. The lack of employees returning to the downtown offices had a domino effect: reduced foot traffic, less use of public transportation, and more closed businesses made many downtowns look like ghost towns. Even after two and a half years, most downtown areas have not returned to where they were epidemic.

In contrast to the way deindustrialization led to abandoned factories and warehouses, the pandemic ushered downtown into a new transitional period. In the 1920s, factories were replaced by shiny commercial high-rises occupied by white-collar workers, but it is not yet clear what the empty skyscrapers of today will become. What is clear is that a city centered around offices will soon be a thing of the past. With housing demand soaring in cities, the most obvious next step would be to convert empty offices into flats and condos. But the drive to convert underutilized office space into housing has been slow.

Without more robust policies to address the failure of downtown, cities will start to take a hit. Even small declines in foot traffic and property use that compound over time will result in lower tax revenues and sales receipts for small businesses, ultimately affecting city budgets. And as city planners reimagine the city center, the impact on the cities’ bottom line has been devastating; In New York, for example, Commercial real estate value It is down 45% in 2020, and research suggests it will still be 39% below pre-pandemic levels.

Less economic activity in urban centers and a lower tax base may lead to fewer jobs and fewer government services, perpetuating the vicious cycle that reduces foot traffic in the city center, leading to further decline and more. a crime, and reduced quality of life. For many downtown residents, the abandoned towns will be a visual appendage, and the throngs of people crowding a Monday morning bus will be apparitions from the recent past.

The death of great American city centers

The devastation of the downtown business districts was an unmistakable turnaround for America’s largest city. in san francisco, Salesforce Tower and other buildings It remained mostly unoccupied as the tech industry embraced remote and hybrid work. In New York, Meta recently finalized its lease agreement for three offices totaling 450,000 square feet. Hudson Yards and on Park Avenuetaking Big financial hit. This tracks trends: San Francisco has it Office vacancy rates from 34% to 40% In some parts of the city, while in New York About 50% of workers have returned to the office.

Even in cities where more workers have returned, like Austin or Dallas, Occupancy rates are still only 60% When they were ahead of the pandemic. These shifts follow the extreme stability of remote work; Researchers for the National Bureau of Economic Research predicted this 30% of the working days will be working from home By the end of this year, a huge jump from what it was before the pandemic.

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Increasing cancellations of office leases have devastated the office real estate market. a study Led by Arpit Gupta, professor of finance at New York University’s Stern School of Business, value erasure has been described as “the end of the world.” It is estimated to have lost $453 billion in real estate value across US cities, with a 17 percentage point decline in rental income from January 2020 to May 2022. The shock to real estate valuations was severe: one building in San Francisco’s Mission District that It sold for $397 million in 2019 On the market at about $155 milliondown 60%.

Other key indicators that economists use to measure the economic vitality of a city center include job vacancy rates, public transit ridership, and local business spending. Across the country, public transportation commuters Still stuck at around 70% from pre-pandemic levels. if Only 56% of employees of financial firms in New York In the office on a given day, the health of the urban core of the city is adversely affected.

The second-order effects of telecommuting and the real estate apocalypse are still in play, but it’s not looking good. A decline in real estate valuations leads to lower real estate taxes, which has an impact Revenue collected to pay bill to city budgets. The decline in foot traffic has deteriorated business lanes; A recent survey by the National Association of Cities indicated that cities expect the least A 2.5% decrease in sales tax receipts and a 4% decrease in revenue for fiscal year 2022. last year, Atlanta tax revenue was expected to decline 5.7%.. Government employees are found and retained problem in New YorkWhere public sector salaries have not kept pace with inflation. There is no doubt that daily operations and basic government services such as public transportation, garbage collection and street cleaning Take a hit from crippled city budgets.

It’s no surprise, then, that in recent months, the combination of a stagnant flow of tax receipts and a hollowed-out downtown has spooked city leaders. At a recent conference, Seattle Mayor Bruce Harrell, Expressed concern about tax returns. “The fact of the matter is, there will never be the good days with everyone working downtown,” he said. London dynastyThe San Francisco mayor told Bloomberg that “life as we knew it before the pandemic is not going back.” In the National League of Cities 2022 surveyNearly one-third of cities said they would be in financial difficulty in 2023 once the federal funds were dissipated. In a recession, things could look a lot worse.

It’s about the new housing, idiot

While there is a lack of demand for commercial real estate, the residential market has gone too far. newly NBER paper New space requirements for remote workers — space for a desk or office, or to accommodate extra time spent at home — have helped drive up housing costs, she suggests.

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The solution to the office housing dilemma seems obvious: converting commercial spaces such as offices into residences. Empty offices could become apartments to ease housing pressure as more people move back into downtown areas. But after two years, only a few buildings have been converted. There hasn’t been a “noticeable increase” in conversions, said Jessica Morin, head of US desk research at commercial real estate firm Coldwell Banker Richard Ellis. Since 2016, only 112 commercial offices have been converted in the US, while 85 projects are in progress or announced, according to CBRE data. Despite the promise of new housing- A recent study in Los Angeles It is estimated that 72,000 new homes could be built in the city by converting offices and hotels – and progress has been slow.

what’s going? Simply put: it is often difficult for developers to justify conversion costs. 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. Apartment buildings must also accommodate common spaces such as hallways, which means they generally have less leasable space than an office building. High labor costs Higher interest rates could dampen efforts to convert offices into homes and inject more risk for developers. “The cost of building is very high,” Gupta told me, “and even if you put aside the specific issues of conversions and just think about the economics of building anything, it becomes very difficult.”

Another impediment to converting from an office to a residential one is the local housing rules. To convert commercial buildings into residences, they must be rezoned—which requires input from community members and local officials—to meet specific requirements. Codes for everything from lighting to sustainability It varies by city, presenting erratic snags in project costs and schedules. Housing developers may not want to put themselves in risky political positions or go through resource-draining approval processes for a high-risk project with the potential for significant financial deterioration.

Gupta study It has been suggested, however, that ever-declining office values ​​may spark greater interest from developers in adaptive reuse projects. Despite its cost and complexity, it may be better than leaving the building empty.

The birth of the Central Social Neighborhood

To avoid a commercial real estate disaster, cities will need to streamline transfers. There are several ways to do this. California has been set aside 400 million dollars To give incentives for adaptive reuse. New York State approved $100 million in funding for the hotel conversions, but stringent requirements led to this Only one developer.

Most impactful at the city level are land use planning processes that can help speed up conversions. laws like Adaptive Reuse Law Passed by Los Angeles in 1999 it can help dispense with some of the city’s most onerous code hurdles, such as parking requirements. Gupta suggested that cities could also adapt their tax laws to make remittances more economically feasible by moving to Land value tax or something similar. Federal initiatives can provide tax credits to developers to ensure buildings are reconditioned and can provide subsidies to city planners to assist with redevelopment projects.

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More generally, combating the death of downtown requires reframing the way we think about cities and the value they provide. Urban writer Jane Jacobs proclaimed her fame 1958 Article for Fortune magazine, “Downtown for People, “that” there is no logic that can be imposed on the city; People make it, and they, not buildings, should fit our plans.”

While the central business district characterized downtowns in the twentieth century, the revitalization of recent cities would hinge on social value. Telecommuting has alienated people, and centralized social areas could be the new allure of cities. Restaurants, coffee shops, and coworking spaces have become as important as industry hubs to the city’s economy. Urban scientist Richard Florida argued in an article for Bloomberg in August that for cities to survive a pandemic, they must shift to Places for strong social networking. Dense downtowns in Austin and New York have seen sharp increases in rent demand, a sign that people are still willing to pay a premium to live in a social area.

This shift likely means 24-hour mixed-use neighborhoods and downtowns where nearly all daily necessities are within walking or cycling distance of where people live. in Montreal And the New YorkSome of the open street programs developed during the pandemic have become permanent, allowing people and events to replace moving vehicles year-round or during the summer months. rehiring Rail yards in Sante Fe, New Mexicoand based on Elevated train tracks in New York In parks, adaptive reuse can be applied to park infrastructure as well.

Corporate work has led to urbanization, but today the trend is to decorativeize downtown. Among the former financial districts, vibrant new neighborhoods can shape and re-establish local consumption. This will require modernization of infrastructure and air conditioning of public spaces and streets, but as Gupta noted, office buildings are already ideally located “at the center of the transport network”. while, Research It associated mixed-use areas with lower crime rates than commercial areas.

The economic health of cities is intrinsically linked to how spaces are used or not, and right now, downtowns are undergoing a massive transformation. Despite the slow motion, it is in the interest of cities to figure out how to transform an office-centric city center into something more convenient for everyone.


Emile Scandole Writer on technology and urban economics, and fellow of the Tony Blair Institute.

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