You’d have to be asleep not to notice the generational change that’s happening in just about every US city. A significant swath of our downtown office space is sitting empty. New York, Chicago, Atlanta, Los Angeles, Denver, Philadelphia, San Francisco, Houston, Dallas and other big cities are experiencing record-high office vacancies as workers keep working from home and companies keep letting them.
Let’s face it: the downtown office market has changed significantly and permanently. Companies – such as Comcast in my home town of Philadelphia – can demand that their employees come back to the office, but they’re fighting against the tide. Work attitudes have changed. Technology is better. Remote working is accepted. Some face-time is necessary but we’re never going to go back to a 100% in-the-office policy, and companies that attempt this will lose talent to those that adapt to the shift.
All this means that a substantial amount of square feet in all those tall office buildings in our major metropolitan areas are going to remain empty. The owners of these properties are already feeling the pressure of meeting higher debt maintenance with lower lease revenue, with many facing default. Countless small businesses in downtown areas facing significantly less traffic are closing their doors. And unless something is done, those empty buildings – after the banks have repossessed them from bankrupt borrowers – will become derelict, inviting even more crime and homelessness. It’s already happening.
So what to do? The good news is that there are many opportunities for the entrepreneurial.
For example, existing office floors can be turned into less expensive single units for startups and incubators who want to boast a downtown address. Some buildings in cities with a vibrant and residential downtown – like Philadelphia – could be turned into residences. Others that are burdened with older, unsafe, non-air-conditioned school structures could convert this space into classrooms for students. Or perhaps all the homeless people sleeping on the streets outside of these empty structures could be given a warm place to stay with medical and counselling support?
With the continuing boom in e-commerce, warehouse space remains costly but could become more affordable – and logistically accessible – in a downtown structure. Manufacturing space could be more accommodating, with a better location making it easier to procure workers. Other alternatives for these buildings already being considered include vertical farming, storage facilities, gyms and movie sets. Or what about taking the red pill and merely knocking these buildings down and creating open spaces, parks, museums or structures that are more amenable to this new era of downtown life?
Sounds great, right? But who’s going to pay for all of this?
The cost of converting downtown office buildings into farms, startup incubators, warehouses or residences would not be trivial. The revenue streams from these ventures are dubious and – specifically if used for public housing or education – would probably be non-existent. Attracting private investment would be an enormous and likely fruitless challenge. For the downtowns of Atlanta, Chicago, New York and Philadelphia to pivot into this post-pandemic world what is going to be needed is a lot of pandemic-era government funding, and considering that more than $6tn has been spent on pandemic aid this is not an easy ask. But it’s going to be asked. And how will voters respond?
Those living in suburban and rural areas – many of which are booming thanks to those work-from-home employees who are now paying more rents and spending more money in their neighborhoods than downtown – aren’t going to be too thrilled. They will wonder why their taxpayer money is being spent on propping up our crumbling downtowns instead of their own schools, police departments and municipal services. This is the looming debate and it is likely to be decided at the local level. And it’s going to play out over the next few years.
But if you’re running a business in a downtown area that’s reliant on the office worker coming back to the office, my advice is you’re going to have to do something quicker. Perhaps public money one day will rain down on you and sow the seeds of new projects that will generate more foot traffic and customers. But you better not wait. It’s time to reconsider your location and your business model if you want to survive.
