Downtown offices

To Transform the Nation’s Downtowns, We Need the Public Sector

In the wake of the coronavirus pandemic, many downtowns across the country remain disquietingly vacant. Office towers that once hummed with activity are a bit quieter, the hallways emptier. The U.S. has the highest office vacancy rates – 18.4% – since 1992. Some levels of hybrid and remote work are here to stay, and now the commercial real estate landscape faces some tough decisions, offering both challenges, which are clear, and unique opportunities, which are less well-defined but coming into focus.

Where companies used to require space for virtually all their workers, hybrid work models mean fewer people in the office and, thus, less need for so much square footage. Now, all across the nation’s downtown areas, developers and owners are asking what the future of the “office” looks like. How do we utilize the space that’s available?

The biggest obstacles confront Class B and C office buildings, often in less desirable locations, lacking amenities and/or technology. These properties have the emptiest space, and many have no viable future as office space.

While there is justifiable concern about the “urban doom loop” syndrome, this moment instead calls for a proactive approach, where the public sector’s role becomes pivotal in facilitating the transformation of some of the under-utilized but strategically located dormant buildings. By leveraging innovative policies and strategic partnerships, many of these structures can be repurposed, fostering economic revitalization and community enrichment.

The challenge of repurposing office spaces, especially in a post-pandemic world, is multifaceted. First among the potential repositioning strategies is to convert vacant office space to residential use, along with potentially supportive other uses, such as restaurants, bars and other retail.  With a shortage of affordable housing at an all-time high, the unanticipated surplus of vacant facilities in downtowns across the nation presents a seemingly irresistible opportunity to address two great challenges with a single solution. It is especially important to locate new affordable housing near access to jobs, mass transit and other services, the surplus of downtown office space.  

However, converting office space to residential is fraught with complexity. These buildings often present structural and design constraints, including large floor plates that hinder cost-effective conversion. The financial calculus of such projects – balancing investment against potential returns – requires careful navigation. It’s here where the public sector has a crucial role to play in transforming underused office space into thriving, multi-functional facilities. Governments at every level can create more favorable policy environments, offer financial incentives and support regulatory reforms.

Starting at the top, the Biden administration in October announced the availability of more than $35 billion in below-market loans to encourage cities and states to convert unused office space into affordable housing. This program can subsidize the expensive conversation process and offset the reduced revenues of providing affordable units (for which rents are capped below market rates). However, for this program to reach its potential, state and local governments will need to make financial, zoning and permitting commitments required to facilitate these conversion projects. Investors and developers are certainly focusing on the opportunity for derisked returns.

One example at the local level is Arlington, Virginia’s Commercial Market Resilience Initiative (CMRI) which demonstrates how the local governments effectively catalyze the repurposing of office space. This initiative, geared towards revitalizing underperforming buildings in a region where the office vacancy rate sits at 22%, showcases innovative approaches, including expanded permissible uses in commercial zones and other regulatory reforms. These changes have allowed for a wide range of conversions, turning vacant office spaces into residential units, educational facilities and even creative spaces.

Moving forward, it’s imperative to foster more robust public-private partnerships and advocate for policy reforms that support these urban transformations. The public sector must continue to play a proactive role, not only in facilitating but also in incentivizing the repurposing of office spaces. This collaboration is key to ensuring that these projects are not only financially viable but also aligned with the broader goals of community development and sustainability.

Today, post-COVID-19, the public sector’s role in facilitating this urban transformation cannot be overstated. By embracing innovative policies and fostering public-private collaborations, we can make progress in transforming underused office space into vibrant, multifunctional areas that serve economic and community interests.

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