Why a White House Plan to Fund Office-to-Housing Conversions Isn’t Working Yet
This Bloomberg article about a well-intentioned but poorly performing US federal government program to financially support office-to-housing conversions near rail transit triggered a series of thoughts I have had about the future of downtowns in the post-pandemic era, and the potential for self-correction in the form of a partial reversion to the status quo ante.
Downtowns across the nation are suffering with many facing a triple threat, abandoned by the office workers that previously fueled their daytime vitality, facing a wave of homelessness and accompanying social problems, and suffering from an exodus of other businesses.
Work from Home Trajectory
One of the roots of downtown's current woes is the normalization of working from home (WFH), the single gift the COVID pandemic gave the office working world. What ultimately becomes of this transformation will weigh heavily on the future of these areas. During the lockdown, there was a lot of talk about remote work becoming the “new normal” and how employers would not be able to put the genie back in the bottle once the crisis receded. Yet, fast forward a few years and we see a vast number of employers busily trying to do just that, strong-arming their office staff back into their cubicles. The great retrenchment is now well underway, with a mid-point “hybrid” work style now the go-to model combining a mix of in-person and remote work. And even this compromise may prove transitory for many workers.
Empty Downtowns
For downtowns, WFH has been a serious blow to all concerned, property owners, supporting businesses, and the local governments and public transportation systems that both serve and rely on office workers. Offices without people are just big, expensive, and declining white elephants in the heart of the city, and there is no future in running the sandwich shop down the street if there is nobody to eat there. Declining real estate values and empty businesses mean decreased local tax revenues, decreased transit ridership, and an overall loss of economic vitality in these areas.
Vacancy rates (the amount of unrented space) in office districts remain the highest in years, while office utilization (the amount of space actually in use) may be as low as half of pre-pandemic levels in the worst cases. So, not only is there a lot of unrented office space, but even rented space is significantly underused. Thus, it is no surprise that asking rents (listed rental rates) have cratered, down significantly from pre-pandemic levels, with sub-leases offering even more severe discounts. And the effects of the COVID shock are still working their way through the system, as pre-pandemic leases expire and are either not renewed, or reduced space-wise on a lower cost basis to improve utilization, with the pipeline of new offices slowing to a trickle. While these numbers are not unprecedented, the commercial real estate crash of 2008 had broadly similar impacts, the concern today is that these changes are structural in nature, relating to this fundamental change in how people interact with the office (WFH), and not cyclical, related to temporary economic factors. A structural change of this nature means that no full recovery can be expected.
What to Do?
One popular line of thinking amongst optimistic urbanists, and the focus of the federal program, is to pursue the mass conversion of existing, but currently unloved, office real estate into affordable and transit-supportive housing and services, thus addressing another large and growing social problem. While a laudable idea that can work in specific limited instances, dreams of turning a significant portion of underused offices into affordable mixed-use urban spaces are just that. From a technical perspective, modern, deep-set, large floor plate office buildings don’t lend themselves to easy residential conversions (think layouts, and the absence of internal natural light, etc), nor are the mechanical systems suited to simple conversions (think bathrooms, kitchens, and individual climate control for every unit). With enough money and engineering, these factors can be overcome, but the outcome will certainly not be low cost and will struggle to be commercially viable while, as this federal program illustrates, even when governments have the will and resources to intervene, they can struggle to structure it in a way that fits the needs of developers.
Saved by the Forces of Reaction?
It may well be that the corporate push to recentralize their scattered workforces, seen by many workers as a reactionary backlash borne of an irrational fear of losing control, may have an unintended benefit for downtowns. In a prime example of how one group’s pain can be another’s gain, reinjecting thousands of high-income office workers and their accompanying spending back into the mix will do a world of good for these critical urban areas (traffic notwithstanding), and by extension, to the overall health of the cities themselves. Is this the solution to the downtown problem that few want, but everybody needs? After all, even grumpy office workers need to eat lunch ;-)
