Walking around midtown Manhattan, one can feel a ghost town vibe. Office spaces have been left empty and there are few pedestrians. Even flagship retail spaces, ones designed to lose money, have closed up shop.
Only 10 percent of midtown Manhattan workers have returned to their offices, and New York governor Andrew Cuomo recently announced that he plans on reviewing an office-to-residential plan, which could potentially help create up to 14,000 apartments in midtown. With the pandemic came the homeworking revolution, so could the days of cubicle culture be long gone?
What will happen to the office spaces in commercial buildings that have been left unused since March? Even if they are in desirable areas, times have changed. According to The New York Times, roughly 14 percent of office space in midtown is vacant—the highest since 2009. Some are calling this the ‘the office-pocalypse.’
Until the world winds up again, some empty office spaces are being turned into affordable housing options, others suggest they could become hotels, with ‘adaptive reuse’ that’s needed to house the homeless and low-income households. Even multi-use zoning could be an option, especially since two-thirds of remote workers want to continue to work remotely. A report from Global Workplace Analytics predicts that up to 30 percent of the workforce will continue to work from home several days a week by the end of 2021. Where does that leave commercial buildings?
Richard Rubin, CEO of Repvblik, a Los Angeles firm that turns commercial space into housing, made news after turning a former hotel in Branson, Missouri, into affordable housing. The premise, which he calls Plato’s Cave, rents out converted hotel rooms turned affordable apartments.
“Housing is right,” said Rubin. “We have a wealth of homeless people in this country, we have millions more who are almost homeless. Housing, food and education are a right not a privilege.”
Rubin’s housing solution has already helped 2,000 people this year, but plans to expand, creating 20,000 apartments before 2025 with 10 adaptive reuse projects in small towns in Alabama, Kansas and Ohio, among others. It’s an example that could take off in the coming year.
“Retail was struggling before Covid-19, and the pandemic has been the death knell,” said Rubik. “There will always be stores, but the consumer habits of the masses have changed. A lot of things have gone virtual, ghost kitchens will replace many restaurants. The carnage that will emerge within the commercial office market will be immense.”
Rubik says the pandemic has shown how much can be achieved working remotely. “There is an argument that office space required will grow based on social distancing measures, but I disagree,” he says. “There will be millions of square feet of vacant office over the next two years.”
Among the other firms turning office space into housing, the Wiencek & Associates in Washington has turned a former office tower in Bethesda, Maryland into housing for the homeless, while Baltimore boasts 17 office spaces that have been converted to apartments and hotels in the older part of its downtown core. Other US cities have office-to-residential conversions, like Chicago, Miami, Boston and Houston, which has recently created a multi-use building called the Kirby Grove complex, mixing over 200 residential units with 250,000 square foot of office space.
One empty strip mall in Santa Fe may be converted into a residential space, according to Mike Loftin, the CEO of Homewise, a social enterprise that helps the middle class buy homes. “In times like these, people start creating and innovating because they need to,” Loftin said recently.
Jennifer Wollmann, a realtor and chairman of the Board of Miami Realtors says that commercial vacancy rates in Miami-Dade County as of October were up 16 percent, while overall vacancy is just under 15. If any office towers get repurposed, it will likely be for healthcare.
“I think some retail spaces may be used for medical purposes,” she said. “I think we will see more short term and flexible leases with concessions given. Also, some retail and office spaces may eventually get used for last mile delivery or distribution.”
But this is no easy feat. Zoning could prove a problem, as mixed-use development is rarely the case, and the rules are steeped in bureaucracy to change them. And some think it’s too expensive.
Hotels are easier, as there’s already plumbing, heating and amenities (kitchens are still a substantial build-out). “How does a converted office or hotel compete in the market with quality, made for residential multi-family?” asks Gary Sopko, senior vice president of Lee Associates. “The answer: it doesn’t, except for select situations where the asset is unique or well-located. The rental demand exceeds supply and the financial returns off-set the risk of redevelopment.”
Sopko doesn’t see office conversion becoming a trend. “It happens infrequently,” he says. It usually happens in cities where a mid-rise office “no longer attracts quality tenants.”
With people moving out of cities for the suburbs, he suggests this won’t be the end of working in an office. “We are social beings and, in most cases, office employees favor being around colleagues, sharing ideas, collaborating on projects and doing this face to face,” said Sopko. By 2022, after the COVID-19 vaccine is widely distributed, “we return to near normal office occupancy levels,” he adds.
Sopko also notes that ‘suburban satellite locations,’ in mid-rise buildings, will cut the commute for workers. It could also allow for smaller teams and eliminate the need for public transportation.
“The other advantage to suburban versus urban office space is cost. The highest New Jersey office rent is less than half of that in a New York City office tower,” he says. “Commercial real estate is resilient.”
An even better alternative would be the rise of the mixed-use building, where a multi-functioning building could thrive—buildings where hotels and condos are under the same roof, or where retail is in the ground floor, offices above and top floor residential properties. They’re already on it in the United Kingdom.
“The conversion of office space to housing has been a trend in the U.K. in recent years due to government planning reforms,” said Anthony Breach, an analyst at the Centre for Cities organization in London. “A lot of the most suitable office stock has already been converted but the government is proposing a further expansion of these reforms to include shops and other commercial uses as well.” He thinks we might end up seeing more retail-converted spaces over the next few years. “It’s going to take time for cities to bounce back, but their fundamental strengths haven’t changed,” adds Breach.
“Once vaccines are rolled out and public confidence returns, we would expect that firms and workers who value face-to-face contact will return to city centres and thereby their commercial work spaces.”
But this may not be the death knell for office space. Some office spaces may continue to rev up in the coming years, while others may be repurposed into multi-use buildings that include housing, retail and perhaps even medical facilities. While many will be working from home going forward, it might alter office design.
“I think how we use the spaces are changing and that a lot of this change was happening before the pandemic, albeit slower,” said Wollmann. “Some companies will downsize their office space as they allow for more people to work from home, while others will expand their footprint to allow for more social distancing in the office.”
While commercial buildings in the suburbs may be an attractive alternative, these smaller, local offices may thrive compared to the commute to downtown highrises. “I think smaller, suburban offices will do better in the short term, if they have the amenities tenants are looking for from a health perspective, like touchless doors and elevators, natural light, good HVAC systems for indoor air quality and green design,” she adds.
“Whether or not office, retail, or any other property type continues to do well or suffers extreme hardship, is also largely dependent on the politics and business climate of where those properties are located. That, however, is the topic for a separate article.”