Downtowns Grapple with Office Vacancy Challenges
Downtown areas have historically served as the vibrant cores of cities, pulsating with activity and serving as economic epicenters. However, the latest findings from the 2023 INRIX Return to Office report highlight a disquieting trend: 18 out of 20 downtowns in the United States continue to witness reduced vehicular traffic compared to pre-pandemic levels.
This decline reverberates across multiple dimensions of urban life.
This downturn in activity is not consistent across all cities. New York, recognized as the most job-dense downtown in the country, has exhibited resilience, with vehicular traffic merely 5 percent below pre-pandemic levels.
In stark contrast, San Francisco, the second-most employment-concentrated downtown, grapples with a substantial 41 percent decline in traffic compared to 2019 levels.
A report by McKinsey introduces another layer to this narrative: office attendance has plateaued at a persistent 30 percent below pre-pandemic benchmarks, further exacerbating the reduction in downtown traffic.
Furthermore, McKinsey's data underscores that from mid-2020 to mid-2022, New York City's urban core experienced a 5 percent population decrease, while San Francisco's urban center saw a 6 percent decline.
Fewer office workers have translated into reduced foot traffic around businesses in these metropolitan areas, which lingers at 10 percent to 20 percent below pre-pandemic levels. The complexities of these dynamics are exemplified by the varying rates of recovery, influenced by distinct local factors.
Economists express concern that midsize cities might be even more susceptible to a potential "doom loop." This ominous loop could begin with vacant offices and canceled leases, eventually spiraling into a more dire situation for downtown areas and city finances.
One Big Worry
There is an overriding fear that the surplus of vacant office space might trigger a decline in property values. This decline would impact not only developers and investors but also the city government, which heavily relies on property tax revenue to support vital services.
Additionally, the empty office space presents concerns about the urban landscape. Vacant buildings may attract crime and vandalism, and their presence can diminish the vibrancy and welcoming atmosphere of the city.
Cities are actively seeking solutions to address the glut of vacant office space. Some are contemplating the conversion of office buildings into residential units or hotels, while others are exploring strategies to draw new businesses into downtown areas. However, it remains uncertain whether these solutions will prove adequate for this complex issue with no straightforward answers.
This transition is causing a ripple effect in the commercial real estate industry. Developers are increasingly constructing mixed-use projects that integrate office spaces, retail areas, and residential units. They are also offering more flexible lease terms and amenities to entice tenants.
While the surplus of vacant office space presents challenges, it also presents opportunities. Cities can seize this moment to reimagine their downtown areas, fostering more lively and livable environments.
Oversupply in Texas
Houston, Dallas, and Austin top the list of major U.S. cities with the highest office vacancy rates, according to Moody’s Analytics. About 25 percent of their office space wasn’t leased as of the third quarter. That was more than double New York’s vacancy rate of 12 percent and well above San Francisco’s vacancy rate of 17 percent.
The elevated vacancy rates in Texas can be largely attributed to overdevelopment. All three cities experienced a construction boom during the 1980s, fueled by developer-friendly tax rules and easy lending that led to a commercial real estate bubble.
Another wave of construction in the late 1990s further exacerbated the issue.
These high vacancy rates in Texas underscore a fundamental challenge in the U.S. office market. It's not primarily the result of remote work; rather, it's rooted in the surplus of office buildings that has been accumulating over several decades.
This oversupply helps explain why the United States has consistently maintained higher vacancy rates compared to Europe and Asia. Even in other thriving Sunbelt cities like Atlanta, office markets are grappling with similar challenges, despite strong economic growth and job opportunities.
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Spooky in Minneapolis
In the 1960s, Minneapolis' bustling downtown streets were so congested that developers devised an intricate web of elevated walkways between buildings, creating climate-controlled passages for office workers who swarmed the city center on weekdays.
These walkways, flanked by stores, fast-food joints, bakeries, and barbershops, seamlessly connected a rapidly growing cluster of modern glass skyscrapers. In the morning rush, office workers diligently kept to the right to avoid collisions, a memory that store clerk Monica Bray fondly recalled in an interview with The Wall Street Journal.
Today, downtown Minneapolis tells a different story. The foot traffic has dwindled, and vacant storefronts are a common sight. The once-vibrant streets have grown eerily quiet, with spaces now frequented by the homeless, police officers, and the occasional tourist. "It's spooky," Bray said.
For decades, downtown office districts across the United States played a pivotal role in fueling local economies, contributing to commerce, tax revenues, and a concentration of ambition, talent, and disposable income.
Now, many cities with partially vacant office buildings are grappling with the challenge of adapting to the new era of remote work without resorting to large-scale demolitions and starting from scratch.
Poised for Transformation
Even the most optimistic estimates suggest that it will take years and cost billions of dollars to bring about the extensive changes needed to reshape central business districts into thriving neighborhoods where people live, work, raise families, and seek entertainment.
“The bottom line is we need to reinvent downtowns around the country,” Jacob Frey, the 42-year-old mayor of Minneapolis told The Journal. “It’s about having more people in the core of downtown doing something other than just working. It’s about having fun.”
Minneapolis has taken steps to encourage this transformation, offering tax incentives to convert office spaces into apartments and contemplating the creation of pedestrian-only zones. The city now resonates with live piano music on workdays along Nicollet Mall, a downtown thoroughfare.
People gather at food trucks and browse through racks of secondhand clothing at pop-up exchanges. In the vicinity, workers are removing asbestos from a century-old office building slated for residential redevelopment.
An analysis of cellphone data conducted by the University of Toronto's School of Cities in June found that foot traffic in 52 major U.S. city centers had dropped by a median of 26 percent since 2019.
The sense of desolation discourages many downtown workers from returning to their offices, further accelerating the closure of businesses and restaurants.
Failing to arrest this decline poses a significant risk to the retention of residents and businesses, as well as tax revenues, creating a downward spiral that could take U.S. cities decades to recover from, warns Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School. "This is a narrow path."
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