Nathan Varnell is a staff writer and first-year MPA student.
Going on three years since the COVID-19 pandemic’s onset, remote work is quickly rendering the 9-to-5 office model obsolete. Although the unemployment rate has returned to healthy pre-pandemic levels, Gallup estimates approximately 56 million Americans are working partially or fully from home. This shift has shocked the commercial real estate market — a shock that will soon materialize as lost tax revenue for local governments, whose vital services are funded by property taxes. Although federal fiscal relief directed at municipalities has prevented deficits, the stress of falling property values on local governments will continue to grow as the CARES Act and the American Rescue Plan phase out through 2024. To embrace the remote work revolution and avert a budget crisis, policymakers must boldly reconceptualize the commercial life of their cities. A promising solution is to incentivize adaptive reuse conversions of these vacant office spaces to create more varied, mixed-use urban centers. Such a transformation could treat many problems at once: office vacancies, housing unaffordability, and the changing lifestyles of hybrid workers.
Although remote work was a necessity of the pandemic, many employers and workers alike have found abundant benefits in remote work. For employers, remote and hybrid models lower their firms’ operating costs drastically. Global Workforce Analytics found that between reduced real estate costs and increased productivity, firms with remote workforces could save thousands of dollars per employee annually. Reducing office use is intuitive; for many companies, it is cost-ineffective to rent office spaces in expensive central business districts when telework is an option. This poses a multibillion-dollar problem for the commercial real estate industry.
A study from June 2022 estimated that the reduced demand cut $65 billion of the value of offices in New York City alone and produced $413 billion in total value destruction across the U.S. over the 2019–2021 period. Office occupancy rates are still shy of 50% as of December 2022, and if that trend continues, urban municipalities will face a catastrophic loss of property tax revenue. Property taxes often compose the majority of local revenue for critical city services, including education, infrastructure and emergency services. The overall effect of this shock depends on the drop in assessed property values, and because property assessments lag behind trends, it could be some time before assessments follow the reduction in occupancy. This shock is likely to affect not just local, but statewide tax budgets too. Policymakers in states such as Texas and Florida that provide relatively low amounts of assistance to their cities may have to fundamentally reevaluate their fiscal structures as a result of the hybrid work transition.
Flexible, cost-effective, and increasingly popular work models like the “hub-and-spoke” and coworking spaces represent solid economic opportunities going forward for real estate investors, workers and local governments. As with complete remote work operating costs are reduced, workers enjoy greater flexibility and companies can more easily relocate their operations compared to 10 or 20-year leases. But private investment in these models alone will not be enough to fully recuperate lost tax revenue. Policymakers can and should employ a variety of policies to revitalize commercial property in urban centers.
Adaptive reuse and mixed-use
Adaptive reuse programs are proving to be an effective strategy to meet these new market demands. Put simply, adaptive reuse is the conversion of a property for a new purpose, historically performed in small-scale conversions from one business to another. However, evidence suggests that communities could see the greatest benefits from using conversions to incentivize mixed land-use, in which private property and public infrastructure are developed for simultaneous commercial and residential uses. Also called “live-work-play” communities, mixed-use conversions would promote urban areas that have car-free access to fundamental necessities and amenities, from healthcare to food to education, in place of the traditional business district. Instead of letting commerce take flight out to suburbs and the home-office, such conversions would bring residents back into the urban centers and commerce with them.
There is certainly investor interest: almost half of all adaptive reuse projects currently being pursued by U.S. developers involve the renovation, rehabilitation, extension or preservation of office buildings — an all-time high. Conversions have even outpaced traditional apartment construction since 2019. Walkable communities are becoming particularly popular with younger generations, who are the most likely to engage in hybrid work and to move to urban centers for educational or career opportunities.
Most importantly, these residential conversions are an intersectional solution to simultaneous issues. The National Low Income Housing Coalition estimates that there is a shortage of more than seven million affordable homes, and there is no state or county where a renter working full-time at minimum wage can afford a two-bedroom apartment. Following the simple logic of supply and demand, developing more housing in attractive, dense urban areas will bring affordability for those who need it.
Conversion challenges and Calgary
Calgary, in Alberta, Canada, is a compelling example of how policymakers can capitalize on commercial vacancies. Their Downtown Calgary Development Incentive Program has put forward $100 million in subsidies for the conversion of excess office space to residential uses. The program is particularly compelling as it was created to treat an oversupply of office space, not the current increase in vacancies due to working trends. As of December 2022, the projects Calgary approved thus far will remove approximately 665,000 square feet of office space from the market and create over 700 homes, according to the program’s website.
Policymakers must provide subsidies not just to attract investors, but also to compensate for the unique challenges posed by conversions. Form follows function, and real estate has to meet the right specifications for elements such as floor size, plumbing and lighting to be an easy office-to-residence flip. Often, it can be cheaper to demolish and build anew than to invest in a lengthy conversion process. Subsidies help cut the costs of overcoming these hurdles, and Calgary is proving such programs can make significant dents in vacancies.
Politically, instituting such a program may appear counterintuitive to local governments when a tax revenue loss is projected, but housing residential tenants at a lower tax revenue is certainly better than no tenants at all. Compared to demolition and new construction, adaptive reuse also has a lower environmental impact and is often faster to complete than new construction. Subsidies will likely not be the solution for all municipalities, nor are they a panacea, but will work best where conversion investment is needed most. Adaptive reuse programs should include a wide scope of policies targeting regulatory obstacles that make projects cost-ineffective for private developers. Streamlining approval processes and creating alternative zoning codes and density requirements will almost certainly be necessary.
As of November 2022, New York office vacancies and the need for affordable housing continue to rise, and the city has appropriately responded by creating the Office Adaptive Reuse Taskforce, with Mayor Eric Adams unveiling bold recommendations this January that could produce up to 20,000 new apartments by 2033. The Big Apple could soon become the nation’s leading example in adaptive reuse and responding to the vacancy crisis.
The seismic shifts of the remote work revolution present an opportunity to reimagine how and where commerce intersects with the rest of our communities, in a way that will have generational impacts. It is urgent that our leaders implement the practical policies necessary for vibrant change and revitalization, lest leave our cities out to dry.
This piece was edited by Deputy Editor Annie Robey and Executive Editor Lancy Downs.
Photo by Dineda Nyepan on Unsplash