Death of the office, birth of a New Downtown?
An under-investigated side of office conversion.
Just a note: this post is more on the policy-economics side rather than the travel-architecture side. If you get bored with graphs, you might have to wait until next post.
Today I’m bringing you two major urban economic issues which I believe have one simple solution overlooked by both policymakers and real estate developers.
Problem #1: Remote work could cause an office real estate crash.
I’m starting with the Forbes-friendly problem. It gets interesting, I promise.
We know the headlines because we lived them. Office usage rates plummeted during the pandemic, for obvious reasons, but by February 2023 they climbed back above 50%. You can find a variety of articles heralding the return to the office, but the truth is, hybrid and remote work are here to stay. My suspicion is many correspondents, often holders of office real estate themselves, are jumping at a return to in-person work because they won’t have to report devaluations of a 30-story liability.
Although office usage has risen since the pandemic, remote work was already gaining steam before COVID-19 was a national emergency, and it’s not going anywhere. According to Digital.com, over two-thirds of businesses closed some or all of their offices since the pandemic. Remote work leads to cheaper overhead costs and higher productivity for companies, and provides greater workplace satisfaction and expanded job opportunities for employees. It’s a “win-win” with the caveat that real estate holders lose big time.
Commercial real estate debt sits at around $1.5 trillion today, according to Yahoo Finance. This debt, held primarily by small and medium sized banks, could cause a major financial collapse if property values in the office sector crash and banks are left holding a 500 million dollar building that they were expecting to be worth $1 billion.
If you’re someone who couldn’t care less about banking, here’s problem number two.
Problem #2: AirBnb/Short Term Rental worsens the housing affordability crisis.
You might see where I’m going with this, now.
Housing affordability in North America has been in crisis mode for years, and things don’t look like they are going to change any time soon. The average price of a house sold in the U.S. has increased more than $100,000 since its low during the pandemic, and it’s not easy to be a renter, either. According to the National Equity Atlas, 50% of all renters in the U.S. are rent-burdened.
Compounding research shows that Short-term Rentals (STRs) like AirBnb have a significant impact on the housing market. STRs don’t only drive prices up by eliminating much of the rental units available to permanent residents, they also warp the neighborhood characteristics. In Amsterdam, tourist-centric businesses like bike rentals are replacing neighborhood grocery stores, according to the Guardian.
I’m not saying that AirBnb should be banned from cities entirely (although Amsterdam is looking into it). STRs have an obvious appeal, and the demand is a strong one. The problem arises when that demand is met in the wrong places, causing gentrification and disrupting a neighborhood’s social fabric.
Solution: Office to Short-term Rental Conversion.
Office to residential conversion isn’t the newest idea, but it’s definitely a trending topic since the pandemic. The vision is pretty simple: building owners scoop out the office floor plans and construct new interiors fit for residential life: kitchens, bedrooms, etc. It’s a great way to build new housing and allow companies to downsize their offices.
Boston mayor Michelle Wu recently announced a public-private partnership to encourage real estate companies convert their downtown offices into residential towers. The program offers property tax cuts up to 75% for 29 years for companies which immediately convert their buildings to residential use. While heavy tax cuts might burden on city budget, it’s worth noting that if the value of office space collapses, the city would see a similar reduction in its tax base.
Office to residential conversion sounds like a perfect solution, but the reality isn’t so simple. While full residential conversion should be implemented where possible, many office buildings have unique layouts which, when combined with necessary residential zoning requirements, make conversion a very expensive process. As a result, many finished conversions are luxury housing to recoup construction expenses.
Here’s where STRs come in: short term rental codes are different than condos or apartments. If short term rental demand won’t decrease on its own, it’s a better idea to have these in a newly converted building downtown than driving up costs in a historically working class neighborhood.
A downtown building likely meets the needs of a short term tenant better anyway: public transportation is clustered around central business districts, and buildings are close to the shopping districts that tourists are likely to visit.
Cities might do well to allow short-term rental units in downtown offices, providing a cheaper alternative to apartment conversion for real estate companies while soaking up demand for STR’s in outer neighborhoods and freeing up housing supply.
Hostels could even become as affordable and accessible in the United States as they are in many European countries.
A list of sources for this article will be linked in the comment section.
When I pull up to the Airbnb and Jeb is telling me the quarterly reports are due
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