Finding success for downtown office space after COVID-19
March 24, 2021
March 24, 2021
Using the right planning tools can spur new uses for Class B and C commercial real estate
Commercial real estate in our downtowns is going to look very different in the coming years. The COVID-19 pandemic has accelerated trends like the adoption of digital business solutions and work-from-home policies, leading many companies to experiment with reducing their physical footprint as their leases come up for renewal.
This doesn’t bode well for the industry. According to the New York Times, Moody’s projects commercial real estate values to decline by 7.2% nationally from their pre-pandemic levels and to bottom out by the end of the year. When it comes to office spaces, that decline is projected at 12.6%.
I believe our downtowns will bounce back—and in some places they already are. They are the heart of a region’s economy, culture, and innovation; that’s not going to change. But they will have to adapt to new market forces and people’s preferences.
When we talk about downtown commercial real estate, the stakes are high. As I pointed out in a previous post, while downtowns average just 1-3% of city land, they account for 10-30% of citywide tax revenue. The National League of Cities recently estimated that US cities could face a $90 billion shortfall this year because of commercial real estate decline.
The good news is that we can start building a roadmap to get ahead of the problem. Planning tools at our disposal can disentangle rules, policies, and overlays, while quickly repurposing and refinancing buildings for different uses.
Doing so will create greater business certainty, leading to business investment and long-term prosperity for municipal coffers.
There’s no point in mincing words, we are in crisis mode. There are more questions than answers out there when it comes to dealing with fallout from the COVID-19 pandemic. I do, however, clearly see an accelerated flight to quality office space, something I wrote about previously.
The flight to quality is exactly what it sounds like—companies making the move to newer and nicer offices. Choosing to upgrade office space is appealing on several levels: location, amenities, efficiency, prestige. Making that upgrade will be cheaper than any year in recent memory.
While there isn’t an exact standard to classify office space, there are three classes that are generally used. A-class space includes the most modern facilities with higher ceilings, efficient large floor plates, more elevators, modern HVAC systems, and often a LEED certification—all more desirable post-COVID. B-class and C-class are older and sometimes difficult to retrofit into a true A-class space. I wrote in more detail on the different classes of commercial real estate here.
As companies look to reduce their footprint, resulting in more affordable A-class spaces, B- and C-class spaces are unlikely to come back to widespread office use. In the post-pandemic world, high-quality HVAC systems and more space will simply be more desirable.
This leads to a need (and an opportunity) to change how we think of those lower classes of real estate and to reposition them for new uses. Retrofitting an underutilized building—even if it’s basically just the shell—will often be 50% less costly than a new build, not to mention more environmentally friendly.
So, what are the needs of the post-COVID economy, and how can we position all classes of office space for the future? Without claiming to have a crystal ball, some preferences and policies are emerging that we can get in front of now.
Disentangling regulations will help fast track the conversion of B- and C- class office space, repositioning these assets for future needs.
Thinking creatively, we can transform our commercial spaces into new and exciting buildings that add value to the community. If done right, building owners can get more value out of their properties and the results can be revolutionary for entire districts. But we need to create the conditions for that innovation.
Every city and BID will have different goals, and every building will have a different best option for retrofitting. There is no one-size-fits-all plan for something as complex as rethinking large commercial assets and how they might fit into a larger plan to reshape a community.
That said, there are several tools at a city’s disposal.
Disentangling policies and regulations will position us to fast track the conversion of B- and C-class office space to alternative uses, repositioning these assets for future needs.
The first step is mapping out the needs of the community and initiating collaboration between the city, building owners, and BIDs. Building the right roadmap to carry on into the future requires getting the right people at the table and setting some common goals.
As vaccines are rolled out and we see the light at the end of the tunnel, we are poised for an aggressive economic recovery for the next several years. By leveraging the right tools, we can supercharge that economic recovery for our commercial real estate sector and reshape our communities for the better.