As we continue to emerge from the economic impacts of the COVID-19 pandemic shutdowns, there is uncertainty (and plenty of hyperbole) about the future of downtowns. Once centers of commerce and weekday locales of millions of office workers, there are some underlying concerns about the obsolescence of downtown office space with the general acceptance of remote work across nearly all professional sectors. There is now an increasingly narrow demand pool of companies seeking space, especially at pre-pandemic levels. According to CoStar, there are more than one billion square feet of vacant office space nationally, not including leased space that is underutilized or available for sublease.

Increasing office vacancy has led to a lot of commentary on the “doom loop” of prolonged office vacancy, or the chain of events leading to economic downturns that occur when office space is left empty and not repurposed. However, even with changes in the economy, central business districts have an opportunity to adapt and meet the moment.

Downtowns have been continuously evolving, even long before the pandemic

While this may seem bleak, it is important to recognize that many downtowns were losing their employment base long before the pandemic began, with the proliferation of suburban office parks, implementation of information technology, and automation of many job functions (e.g., there are way fewer filing clerks these days). Many downtowns were stabilized by residential development, expanding hospitality supply, and the concentration of government operations and workforce (although this is an increasingly less reliable source of stability at the federal level). Downtowns are now seen as the “front door” for visitors to a city and region given access to public transportation, arts and culture, and historic amenities. The shift to a 24-7 live-work-play downtown has been in process for decades now with the promotion of vibrancy through continued investments in arts and entertainment, festivals, placemaking, and public spaces.

Repurposing downtown office space is not a one-size-fits-all approach

Now the big question is what to do with all these office buildings. As a response to shifting workplace preferences in the 1990s with the need for more robust HVAC and IT systems, many historic skyscrapers and buildings (those generally built before 1940) went vacant for years. Through the historic tax credit (HTC) program – among others – developers began converting much of this office stock into residential units well before the pandemic, coinciding with general strategies to increase the downtown housing stock.

In this new era, a large share of buildings with the greatest adaptive reuse potential – smaller building size and floorplate configuration, as well as greater access to natural light – have been converted. Now the question is what to do with the Le Corbusier-inspired Internationalist or Brutalist buildings with larger floor plates, less access to natural light, and substantial scale (although generally everything gets more complicated and expensive as the building gets taller and you add more units). For example, based on a dataset compiled by CBRE, over the last 10 years, around 70 percent of office conversions were completed in buildings containing less than 200,000 square feet. ESI’s work on the New York City Office Adaptive Reuse Task Force in 2022 framed many of these issues and suggested an opportunity to examine regulations governing conversions and evaluate the potential of financial incentives to encourage the production of affordable housing.

Residential conversions are only one component of a downtown adaptive reuse strategy

As cities face housing supply shortages, the easy answer is to convert obsolete and/or less competitive office space into apartments or condominiums. But what is the path forward for properties that have designs or configurations that are less conducive for residential conversion?

The good news is that the market is already showing new opportunities for office conversions with a shift towards alternative commercial uses. According to CBRE, around half of office conversions over the last decade were for non-residential uses. Therefore, cities and states need to continue providing resources to create more opportunities but also consider these efforts as part of a broader downtown economic growth and diversification strategy.

• Expand the hospitality supply– Downtowns continue to leverage tourism and visitation, including convention activity, to add market support for retail and increase the local tax base. Generally, hotel activity has recovered since 2020, and in many places, downtown room night activity is above regional performance. There has also been a shift in the hospitality industry to create more boutique hotel experiences and conversions of historic buildings can create more unique spaces, including trendy bars and restaurants, compared to a conventional national brand. Some examples in Ohio’s legacy cities include The Waterloo in Cleveland and two hotels in Cincinnati, including a smaller boutique hotel.
• Grow the innovation ecosystem – Downtowns historically have been epicenters of commerce and innovation. While there are signs that the life sciences market is cooling, there has been momentum with converting conventional office space into lab space. Over the last decade there have been 37 conversions of downtown office buildings to life sciences space. The vast majority have been in Boston, and other markets have followed suit, including Durham, Seattle, San Francisco, and Philadelphia.
• Leverage higher learning and anchor institutions – There has been momentum for community colleges and universities to create a footprint in downtown areas for many years. This allows the institutions to make better connections with the existing employment base for supporting continuing education classes as well as expanding partnerships with major employers, court systems and local government. With a soft market for private sector leasing activity, some property owners have been executing leases with local institutions or the institutions themselves have invested in existing office structures, such as Georgetown University’s proposed expansion into Washington, D.C.. In Downtown Louisville, Humana Inc. donated one of its office properties to University of Louisville to host its Health Equity Innovation Hub.

• Create opportunities for attracting arts, culture and vibrancy – As downtowns continue to evolve from places to work to places to be, a thriving arts scene is imperative. Whether through existing arts institutions, more nimble and organic arts nonprofits, or individual artists and creators, leveraging existing office space is an opportunity to concentrate these activities. In some cases, developers have had to pivot from initial plans for residential conversions to alternative uses based on evolving market conditions, like the Warfield Building conversion in San Francisco.
• Growing the knowledge sector employment base is still possible – While many employers are leasing less space, there is still a strategic opportunity to maintain a downtown presence, albeit with less square footage. There has been a well-documented “flight to quality” trend, shifting from conventional office spaces to higher quality and highly amenitized spaces. While not a conversion, the renovation of 780 Third Avenue in Manhattan shows that the continual rethinking of how conventional office space looks and feels is paramount for maintaining competitiveness.

As the economy evolves and the needs of cities and central business districts evolve, so will the use of commercial real estate in those areas. Innovative solutions will attract residents and visitors to cities and spur economic development.

Brian Licari | BLicari@Econsultsolutions.com

Brian Licari is a vice president at Econsult Solutions, Inc. (ESI). His career background and interests are in analyzing, developing, and implementing economic development and community revitalization strategies ranging in scale from the grassroots neighborhood level to regional business development efforts.