What Will Happen to Offices in Central Business Districts?

In this article, you'll learn:

• The impact of rising office vacancies in central business districts, exacerbating economic challenges for cities.
• The influence of decreased foot traffic and lower property values on urban economic stability.
• Potential solutions for repurposing empty office spaces to revive downtown areas.
• How tenants can navigate the changing landscape of office real estate to safeguard their interests.

The concentration of empty office buildings in central business districts represents a massive challenge for businesses and taxpayers alike.

Record-breaking vacancies are having sweeping negative economic implications on financial districts. High land values are plummeting to a fraction of what they were worth pre-pandemic after a steep drop in use.

And as foot traffic pulls away, so do other attractions that used to make a downtown area so appealing. For example, earlier this year, thousands of retail stores closed locations in urban areas for several reasons. Relying on visitors who worked in nearby office buildings, shops, and restaurants saw their ROI's disappear when employment opportunities largely turned hybrid.

This starts a very nasty cycle of dropping property values that, in turn, lowers the revenue an urban area relies on. Suddenly, the property taxes that a city center was used to are gone, and what used to be a bustling area now can't afford the same standard of upkeep and maintenance.

For businesses, what used to be a prime location in a CBD, could turn into an albatross for the length of a lease.

So let's look at the deeper consequences of this phenomenon. Buildings located in central business districts are marking unprecedented vacancies, and this is challenging the overall economic prosperity of large cities. As companies continue to shift away from urban areas, the question emerges: Just what will happen to offices in business districts?

Dropping property values and the Urban Dystopian Spiral are symptomatic of an Office Apocalyptic environment. Download the survival guide now. 

Washington D.C.'s Central Business District

The central business district in our country's capital city has taken quite a hit. The cultural hub is suffering as its commercial center is held hostage by zombie buildings with low occupancy.

Overall office vacancy rose to 22.%, an increase of 40 basis points for the quarter and 100 basis points from the same time last year.

Since 2020, the assessed values of D.C.'s largest office buildings have decreased by nearly $7 billion, representing a 12% decline and resulting in a loss of about $143 million in property tax revenue for the District.

The situation is worsening as office vacancy rates hit new highs each quarter. According to a report from D.C.’s Office of Revenue Analysis, this decline has significantly affected the District's finances, with taxes from large commercial office buildings now making up about 38% of all property taxes, down from 48% a decade ago.

Empty Office Buildings

Empty office buildings poise a long-term problem, potentially requiring a complete rethink of what to expect from a business center. A report by Daniel Muhammad highlights that a surplus of office space leads to lower property assessments, reduced net income, and diminished appeal to investors, further decreasing sale prices and overall market value. This issue is widespread, especially in large cities,

It also comes at the same time as businesses largely shifting towards alternative markets like tertiary cities and suburbs.

These locations offer several advantages, including lower operating costs, larger and more flexible spaces, and potentially more accommodating regulatory environments. They also have markedly lower vacancy rates across the board, thus providing more potential long-term stability for new leases.

Other Cities' Financial Districts in Hot Water

Washington D.C.'s office vacancy rate is slightly above the national average of 21%. So, imagine how much worse this crisis in in the cities with the highest office vacancy rates. Yes, that's right, it gets worse than 21%.

The office vacancy rate in San Francisco's city center is eclipsing 35%. This crisis is compounded by the city's exorbitant living costs, high taxes, and escalating crime rates. The oversupply of office space has forced property owners to offload their buildings at drastically reduced prices, nearly 90% below their previous valuations. This downward spiral not only devalues properties but also threatens the economic stability of the city center.

With a 31% office vacancy rate in the central business district, Denver's business center is also facing a recession. Despite reasonably priced rents among office buildings being leased for an average of around $30 per square foot, the city is dealing with a serious "zombie building" crisis. This contributes to the Urban Dystopian spiral where empty buildings drain the greater market of significant capital, rapidly worsening the environment.

Other cities at high risk due to high vacancies include:

• Seattle
• Dallas
• Houston
• Atlanta
• Los Angeles
• Chicago

Learn what other cities make the list of highest vacancies. 

A business center more reliant on property tax income is more vulnerable to this shift. Look at New York City, where around 40% of the municipal revenue is generated from property taxes. A significant portion of this comes from commercial properties, primarily office buildings. This heavy reliance on commercial real estate ties the city's fiscal stability closely to the health of this market, making it highly susceptible to economic downturns in the office sector.

Boston mirrors this dependency, with approximately 40% of its revenue also stemming from property taxes on commercial properties. The city is at risk of a substantial tax revenue shortfall, potentially losing up to $1.5 billion over the next five years due to declining office property values.

What is the Future of Financial Districts?

The problem of empty offices is expensive so naturally, it's at the top of the minds for the cities most reliant on commercial property tax revenue. So, what are the suggested solutions for the empty space?

• Adaptation and Repurposing: Cities may encourage or facilitate the conversion of empty office spaces into residential units, mixed-use developments, or other commercial uses that can generate revenue and activity. It's the most popular solution, because no one is talking about just how expensive it is. Read about the Costly Complexities of Office Conversions. 
  
  
• Policy Adjustments: Local governments might implement tax incentives or policies to attract businesses back into office spaces or to repurpose them in ways that maintain or increase property tax revenues.
  
  
• Economic Diversification: Shifting focus to attract new industries and businesses that require different types of spaces.
  
  
• Remote Work Integration: Adopting hybrid work models that reduce demand for traditional office spaces while utilizing flexible work environments.
  
  
• Urban Planning Adjustments: Reevaluating urban planning strategies to better accommodate changing work patterns and enhance the adaptability of office spaces.
  
  
• Property Tax Reforms: Exploring alternative revenue sources or adjusting property tax structures to mitigate the impact of declining office space values.

Only time will tell as cities adapt to a new era of work. But businesses can't wait around to get caught in the crossfire of a lease in a failing urban area. So, let's discuss how corporate tenants can safeguard their interests going forward.

Takeaways for Tenants

Amidst high vacancies transforming central business districts, tenants can navigate this evolving landscape through meticulous lease planning and strategic adaptation.

Adjusting lease terms, like negotiating rents and durations, allows businesses to tailor their space requirements to current needs. Exploring alternatives such as subleasing or shared spaces optimizes resource utilization, while embracing remote work and diversifying activities enhance flexibility and resilience. Keeping aware of economic shifts and engaging with the community are also vital for thriving in these changing urban environments.

In addition to adapting within city centers affected by high vacancies, tenants also have new opportunities emerging in tertiary markets or suburbs. These locations offer potential advantages such as lower costs, larger spaces, and a potentially more flexible regulatory environment. Businesses can consider relocating operations to these areas to capitalize on these benefits while still maintaining accessibility and connectivity through modern communication technologies. This shift allows for greater adaptability to changing market dynamics and may align better with evolving workforce preferences for more dispersed work locations. It also presents opportunities for contributing to local economic growth and community development outside of traditional city centers.

At the end of the day, corporate tenants are navigating a completely different landscape than when they may have signed their leases. Unfortunately, if due diligence is not done, businesses can lose millions on non-viable properties and leases that no longer suit their interests. So, stay informed and download your survival guide to managing corporate portfolios in a post-Office Apocalyptic environment.