American cities are plagued with vacancies in what not all that long ago were vibrant downtown areas. This shift resembles the urban flight of the 1960s and 1970s, when hollowed out urban centers were perceived to be, and often were, seen as too dangerous for anyone others than those who could not afford better to live there. Cities then were already disfavored by families; most young couples decamped to the suburbs once they had kids. But the self-reinforcing cycle of residential exodus by those who could afford to leave directly eroded tax bases by falling rents and rising vacancies, hitting property tax receipts. They also had knock-on effects through the closure of business that catered to inhabitants, and even commuting workers, since if they perceived a safety risk, they’d be less inclined to shop or have a drink before they went home.
Urban crime rates fell in the 1990s which many attribute to the impact of lead-free gas on the health of fetuses, and by then, young adults. Others wanted to credit better policing. Either way, cities became popular with the middle and upper middle classes again, reflecting the attraction of having day-to-day amenities close at hand.
American cities are still reeling from the impact of Covid work-from-home policies becoming quasi institutionalized, leading to a high vacancy rate even in what was formerly prime office space, plus the knock-on effect of reduced commuter spending.
Below we present a short tale of two cities, St. Louis and New York City. The Wall Street Journal depicts St. Louis as distressed, to the point of entering a “doom loop”. From its account:
The Railway Exchange Building was the heart of downtown St. Louis for a century. Every day, locals crowded into the sprawling, ornate 21-story office building to go to work, shop at the department store that filled its lower floors or dine on the famous French onion soup at its restaurant.
Today, the building sits empty, with many of its windows boarded up. A fire broke out last year, which authorities suspect was the work of copper thieves. Police and firefighters send in occasional raids to search for missing people or to roust squatters. A search dog died during one of the raids last year when it fell through an open window….
It anchors a neighborhood with deserted sidewalks sprinkled with broken glass and tiny pieces of copper pipes left behind by scavengers. Signs suggest visitors should “park in well-lit areas.” Nearby, the city’s largest office building—the 44-story AT&T Tower, now empty—recently sold for around $3.5 million….
As offices sit empty, shops and restaurants close and abandoned buildings become voids that suck the life out of the streets around them. Locals often find boarded-up buildings depressing and empty sidewalks scary. So even fewer people commute downtown.
This self-reinforcing cycle accelerated in recent years as the pandemic emptied offices. St. Louis’s central business district had the steepest drop in foot traffic of 66 major North American cities between the start of the pandemic and last summer, according to the University of Toronto’s School of Cities. Traffic has improved some in the past 12 months, but at a slower rate than many Midwestern cities…
It’s the cities far from the coasts that are suffering most. Six of the 10 U.S. office districts with the steepest drop in foot traffic between 2019 and mid-2023 are in the Midwest, according to the University of Toronto…..
Reversing the doom loop spiral isn’t easy once decay has set in. To boost local businesses, the city wants to encourage developers to add hundreds of apartments by converting empty office buildings. But these projects are expensive. Rents in St. Louis are low, and high interest rates haven’t made things any easier.
When investors can’t make a residential conversion work, they often choose to wait for years until funding or a buyer materializes—a pitfall of relying on private developers to revive an office district.
The Journal account has impressive, granular detail about how St. Louis’ hollowing out progressed.
New York City is trying to steer out of a similar, but much much less advanced decline path. The cornerstone is to convert office buildings to apartments. The article below does not sufficiently acknowledge how difficult that is, from the size and configuration of windows to putting in bathrooms. Having said that, a fair bit of Lower Manhattan offices were converted over the preceding two decades, but many of those buildings had a fair number of offices with water views, greatly increasing the potential attraction of residential space.
By Greg David. Originally published at THE CITY on April 10, 2024
Bills to enable housing in reconfigured Manhattan buildings remain mired in ongoing Albany budget talks even while nearly 100 million square feet are vacant.
New York City’s office market is stalled with the vacancy rate stuck at a record high, and the best hope for improvement in the near future depends on whether the governor and the legislature can agree on legislation to speed the conversion of office space into housing.
Reports issued in the past week by the city’s large real estate firms show 20% of the 463 million square feet of office space in Manhattan is empty. Another 5% is so-called sublease space, which means either it is occupied but available for anyone who wants to take it off the tenant’s hands or vacant but the rent is being paid by the tenant until the lease runs out.
There are some signs of improvement in Midtown, but the vacancy rate remains high and rents depressed, and the situation is far worse elsewhere in the borough.
“There is Midtown and then there is everything else,” said Michael Slattery, research manager with the real estate firm CBRE. “There are pockets that have started to recover. Park Avenue has a single digit availability rate.”
The weak office market continues to hamper the city’s economy, even though total jobs are back to their pre-pandemic level. Long-term, the city is expected to slash the value of many office buildings, which could cost the city $1 billion in tax revenue, according to city Comptroller Brad Lander. While significant, the $1 billion is only about 1% of the entire budget.
While the overall vacancy rate of 20.1% at the end of the first quarter remained at a record level, according to CBRE, the numbers for Downtown and Midtown South were far worse.
Downtown’s vacancy rate is nearing 23%. New leases totalled only about 600,000 square feet in the first three months of the year, one-third of the long term average, and most of those were for small offices. One-third of all the office space is available for sublease.
The vacancy rate in Midtown South surged to a record high of more than 24% as leasing declined. While New York has seen only modest layoffs from big tech firms compared with what has happened on the West Coast, the tech companies that remain heavily concentrated in the area appear to have become cautious.
Midtown fared the best as financial service firms continued to be willing to commit to office space, especially in new or recently renovated buildings near transit hubs, Slattery notes. Still, the vacancy rate exceeds 18%.
He adds that “commodity space” in the city’s older and much less desirable buildings is going begging and that those are the buildings most likely to be candidates for conversion to housing if legislation can clear a series of obstacles.
In January, Gov. Kathy Hochul proposed legislation that would provide a property tax break for New York City conversions when the owners agree to include a percentage of affordable apartments, although her proposal did not include specifics. Increasing the allowed density for residential buildings and relaxing some existing requirements for windows and other open space would be crucial as well.
Sources with knowledge of the talks in Albany say that the issue remains under negotiation as a deal nears on other major issues in the pending and now overdue state budget. Democrats in the legislature have previously been insisting conversions include affordable apartments without a tax break.
While not a magic bullet, conversions would help by removing obsolete office buildings from the market. While Downtown continues to have its problems, the situation would be much worse without the many conversions that have happened in recent decades.
In the last several decades, 272 office buildings have been converted to housing, adding 18,000 apartments to the area, according to the Downtown Alliance. Lower Manhattan is where most reuse has occurred because many of its buildings were built decades ago with smaller, easier to convert floor plates and because existing rules allow them to be renovated.
In recent months, the owners of 111 Wall Street and 222 Broadway have announced they are converting, reducing supply by 1.5 million square feet. Those two buildings alone would have added 2 percentage points to the vacancy rate, had they remained office buildings.
“Conversions have been part of the story downtown for 30 years and have been beneficial in creating housing and building a 24-hour community,” said Jessica Lappin, the former City Council person who is now president of the Alliance. “We saw the benefit of that in COVID and we are seeing it now.”
She notes, however, that 70% of those conversions occurred when the city offered a major tax break, called 421-G, that provided an exemption from property taxes during one year of construction and an 80% cut in real estate taxes for 14 years. It expired in 2006.
“Who knows what the future will bring for office leasing,” she said, “so why wouldn’t we want more flexibility for office buildings?”
The administration of Mayor Eric Adams has taken some modest steps on its own to help owners including establishing a one-stop office for property owners seeking to convert, and zoning changes that would allow residential use in the Garment District and seek to expand flexible zoning rules to other parts of the city allowing buildings built before 1990 to be converted.
But the key remains in Albany. A tax break and the zoning changes could result in 20,000 additional apartments over the next decade, according to the Department of City Planning.
“Empty and underused office space isn’t good for anybody,” said Dan Garodnick, head of City Planning, in a statement to THE CITY. “Office conversions offer a win-win for our city: putting space to better use, helping to create more vibrant neighborhoods, and of course, creating much-needed housing.”
This is interesting.
Acres USA is going to have its annual conference in St. Louis this upcoming December. I plan to go.
Reading this makes me wonder what I will see there besides the conference itself.
https://bookstore.acresusa.com/products/eco-ag-conference-trade-show
I also have a conference invitation to St Louis, based around the (rather grand-looking) railway station. I realise this is anecdata, but I wonder if the facilities in St Louis capable of attracting outsiders are offering highly competitive rates. Transport links and venue both seem good.
I remember years ago, I think 2012 maybe, was the last time Acres USA had its annual December conference in St. Louis. It was a 1/2 mile or maybe a little less walk from the train station to a huge legacy building of some kind with hotel space in it and some of the non-room space containing various businesses. Other parts of the huge legacy building were still dark. I have sketchily vivid details floating in a sea of otherwise blank. ( They haven’t said yet where exactly this year’s conference will be. Maybe in that same huge legacy building.)
Here is a fun memory from that conference of years ago. The night before everything was going to start the next day, I and some other conference goers were in a smallish restaurant area. I was just listening to a few of the people talking, in what I believe to have been a heavy WesterSouthern accent. I learned they were from Southwest Kansas.
At one point one of the ladies asked me what kind of farming I did.
I said that I was not a farmer. I was just a reader ( meaning reader of Acres USA).
She asked me what kind of reader I was . . . crystal? pendulum? I said no, I meant I was just a reader-subscriber to Acres USA. She immediately lost interest in me and went back to talking/listening with her little group of fellow attendees. Then a crusty leather-faced man ( part of the group) started talking about ” working with the discarnate entities”.
Very interesting. And years later when I started attending a few Mainstream Organic conferences, I never ever heard anything remotely like that from either presenters or attendees. The Organic crowds were a lot more mainstream than the Acres crowds. And for the most part still are, though they are beginning to overlap a little bit at the edges.
( And it is in St. Louis that a few relict populations of an introduced bird called the Eurasian Tree Sparrow still hang on. Some birdwatchers make an effort to see them.)
https://nesthollow.com/eurasian-tree-sparrows-vs-the-house-sparrows-invasive-twins/
Anybody know the airspeed velocity of an unladen Eurasian Tree Sparrow?
Not a European or African one? There is a lot of technical difference between the two-
https://www.youtube.com/watch?v=liIlW-ovx0Y (2:31 mins)
even before Covid (for years), central St Louis had a sad “Potemkin Village” feeling to it—a lack of a critical mass of pedestrian traffic, despite so much potential.
unless things get turned around soon, St Louis is on the cusp of being pulledi to the event horizon.
i remember the huge MOOG auto parts plant in st. louis, it closed once the ink was dry on bill clintons nafta.
manufacturing was heavy in most u.s. cities, till free trade stripped most manufacturing out of america. the cities facing Armageddon would not be in such a precarious state with needed supply chains that were always close by, occupying many buildings sitting empty now.
High rents were helping drive businesses out existence long before Covid. There was much talk about empty New York storefronts.
Also, a nation full of low paying gig workers doesn’t support “vibrant” city centers in the same way.
In Hollywood, where I worked before Covid, high priced, newly built apartments were already sitting mostly empty. And California is now losing more population to other states.
In short, “the rent’s too damn high” (all around) had a jump start on doing Covid’s work… and is still continuing with that work.
Thank you, Yves.
You can add London, Birmingham (UK) and Paris and I’m sure other cities outside the US to that.
Firms (Including HSBC and Clifford Chance) are returning from Canary Wharf to the City (near my employer) and la Defense to Paris (including my employer) and to smaller buildings (including mine).
The landlords and municipal authorities are relaxing rules to allow conversions and / or allow more residential. In the City, residential development was confined to the periphery, but the Corporation is now allowing movement towards to core / centre of the square mile.
Dublin Ireland might well be added to that list.
The office building where I worked my latest contract currently has two tenants. One is paying for the lease until the lease expires but has already moved out and the other tenant is using maybe 20% of the space they are paying rent for. Too early to tell what they will do once the lease expires, my guess is that less space will be rented. Building is in IFSC (central Dublin) and less than 10 (ten) years old.
Around that building new offices are being built, possibly the projects started based on some hope of Brexit spillover. When I walk around the IFSC then I see older office-buildings being advertised as available for rent and I am not sure how it is expected that the new office-buildings will be filled.
The salaries of the people who might be expected to work there might start at as low as 27kEUR per year for people with degrees and fluency in foreign languages (I see job-ads for just that). The people working in retail in the area might be on similar or less income. Income tax is low for such individuals but paying for accomodation on that kind of salary leaves very little. Rents are high.
Which leads to companies in Dublin having difficulty to recruit due to the demands for livable wages in this high-rent environment. Some companies choose to relocate as they can’t compete (my previous employer as well as employers of friends did) and others choose not to come to Dublin. It looks like the office rents (probably also retail rents) will have continued downward pressure. Rents for accomodation will probably go up more as the population increases every year.
Thank you, Jesper.
This is a topic I now have to follow — for what I hope is an uncommon reason, especially among the commentariat.
Early last October, I got a notice that a former employer (very former; I’d left that job 25 years before, to go back down to Georgia and help the campaign of the last man to run against Newt Gingrich) had decided to switch the firm managing their 401(k) plans. Which meant I had a choice to make, too: what to do with my funds.
I had been letting that money be, as part of a longish-term quasi-diversification strategy to leave my several nest eggs from three earlier careers (and my conventional IRA) separate, and draw down from them as needed for my late-onset family lifestyle. (I’m old enough to get the money, but not quite old enough to have to in required-minimum quantities.)
At the time, it seemed simplest and best to just roll over this particular retirement lump into my existing IRA with another management firm, rather than into a new IRA or another investment with the old employer’s old firm (or taking the money directly myself). So that’s what I “directed” be done. The not-so-personal financial advisor I spoke to acquiesced, but he did say the rollover would have to be paid out in two parts, because some of it had been invested in securities that would have to be liquidated. I acquiesced in my turn, saying I understood that such things could happen.
Unfortunately, the call wasn’t recorded (not on my end, anyway) — so I don’t know or remember if the words “commercial real estate” were spoken. But a goodly first rollover was accomplished, and I left the matter there.
Until I got another e-mail from that firm last Friday night, saying they had another urgent message for me in their portal. And that turned out to be another warning that I needed to tell them what I wanted them to do with my retirement funds from the old employer. Huh?!
I wrote them over the weekend, and called them once they were open, to ask what was going on. Apparently the remaining funds still remained with them because the securities fund they’d been in still hadn’t been liquidated — six months later. And the fellow I spoke with this time told me the firm had no idea when that fund would be liquidated — and when it was, I’d be waiting in line behind folks who’d been waiting even longer for their money.
Now, I’m not big-time at all; I had at most barely six figures ever vested and invested with this firm overall, and these leftovers were down to five. So maybe I managed to engage the rep’s sympathy, between that and his looking back at the firm’s files on me, and seeing that I had asked for a full rollover before. He assured me I wouldn’t have to re-file rollover forms after all. He even agreed to pass on an inquiry as to whether, under my semi-involuntary circumstances, I could be allowed to transfer my balance to another fund type and complete the rollover from that point instead. (Unlikely, I expect, but I felt I had to ask.)
But, if not for that employer’s move away from this firm, I might not have known that part of my money with them was indefinitely unavailable until I tried to avail myself of it. And now I have a (heh) vested interest in keeping track of this situation, don’t I?
As far as I can tell, its still 1971 in New York City, but with the loss of over 1 million small restaurants, stores, bars….
As as venture capital devours residential properties at bargain basement prices and re-rents them to the displaced tenants at triple the mortgage rate, who are these venture capitalists planning to rent all these vacant apartments to? Curious minds would like to know.
They are not venture capitalists. Venture capitalists invest in tech and also have not all that big funds.
You are thinking private equity.
And your assumption is not accurate. From Housing Wire last year:
https://finance.yahoo.com/news/no-wall-street-investors-haven-015642526.html
Converting office space into apartments is expensive, often times almost to the level of being cost prohibitive. A major omission in this article is that NYC has some of, if not the, highest construction costs in the entire US. As bad as things are in the Midwest, it would be significantly cheaper to convert buildings there as well (albiet still expensive).
I just don’t see this as a viable solution, at least without significant haircuts to the firms which own these office buildings. The value of these office buildings has a lot further to fall before these deals are anywhere close to viable. I don’t see getting out of this “doom loop” that way as even a little realistic, at least until things have spiraled down a lot more.
Be rational about it. Why even bother converting these office towers when you can pick up farmland on the edges of suburbs or old strip malls which have fallen into disrepair which will cost way, way less, can be demolished cheaply, and apartment complexes can be built on the site in a much more cost effective 4 story way. It seems to me, as someone who has spent a lot of time in the construction industry, that most signs are pointing to a hard rain coming down on urban centers in major US cities in the next decade or so.
Progressive left hand: it’s wrong to cram people into housing w/narrow footprints, little ambient sunlight, suboptimal amount of resident amenities.
Progressive right hand: let’s convert office buildings and cram people into housing w/narrow footprints, poor sound insulation, (often) poor temperature insulation, no parking, and (often) little ambient sunlight in a neighborhood far from schools or big box grocery stores.
2019 is never coming back, no matter how much C-suite and CRE dinosaurs roar for its return. Covid merely accelerated the secular hybrid work trend. Presumably this is only going to intensify the bifurcation of cities into winners and losers — the latter inevitably shrinking.
from the prologue…
When investors can’t make a residential conversion work, they often choose to wait for years until funding or a buyer materializes—a pitfall of relying on private developers to revive an office district.
They’re waiting for the big guy (or some other toady) to foot the bill
from the post
and the best hope for improvement in the near future depends on whether the governor and the legislature can agree on legislation to speed the conversion of office space into housing.
Kaching. Capitalism? I think not.
Well all those tony NYC lofts were once manufacturing and here in SC old cotton mills are being converted to lofts as well. But surely the Bauhaus to our house office towers as seen in Mad Men will be less picturesque and friendly. Still any port in a storm when it comes to finding a NY apartment?
In an officd building conversion to apartments there are a few expensive issues to 0vercome
Toilets are in the wrong place.
Baths and Showers are usually absent
Kitchens are absent, as are the flues to vent the kitchen
Electrical Service generally meters in a few wrong places.
Office ventilation is very different from apartment ventilation
As a start.
Those who propose turning a high rise from business to apartments have no thought the cost of conversion is. Conversion costs are so high that the only usable part of the building is probably a car park.
Convert office buildings to hostels, no problem with toilets. Then convert hotels to apartment buildings. Ta-da! You can thank me later, New York.
None of these seem major barriers to conversion. Unless one assumes the conversion just requires new internal wall configurations!
I would assume conversion requires ripping out much or all of the existing HVAC and wiring and drilling new risers for plumbing and drainage. But, other than interior walls and fit out, these are the costs of conversion. Still cheaper than erecting a new building.
I see a lot of comment about the floorplates being too large but, seriously, unless it is a trading floor, it cannot be so large that a design solution cannot be found to use the interior spaces lacking natural light. A generous set of stairwells-cum-lightwells, elevators, hallways, lavish built-in storage per apartment, cinema rooms, gyms, isolation tanks, panic rooms etc. You could even put in a car elevator and private garaging or hydroponic growspaces. :-)
What this reduces is profit per square foot. But something is better than nothing….
Architect here. These are in fact major barriers to conversion. As built, there’s typically only a single drain-waste-vent and water supply stack (chase) per floor. So it is all but impossible to put in individual bathrooms, kitchens, compartmentalized zonal HVAC systems without running all of that through drop-ceilings and drilling through the reinforced concrete platforms that make up each floor deck. Interior natural lighting and almost any natural ventilation is impossible (office building windows don’t even open, typically). Fire code requirements are different, too.
TLDR: $158/sq foot is the typical price of new residential construction in the US. So unless the building can be purchased for a fraction of that, conversion is a financial non-starter. You can just build new multifamily on the outskirts of town and the future occupants will be much happier, without having to deal with apocalyptic looking downtowns, high crime, and missing small local business.
As far as why so many working class/middle class whites moved out of cities 50’s to late 70’s, perhaps some urban studies books would be in order. Like Crabgrass Frontier, which details the rating system of every big city block in all cities, a map put out by the gov’t since FDR and types used up to the 70’s. If you wanted to stay in the south bronx, for example, or the mission district in SF, back then you could rarely get a loan, to buy or upgrade, even if you were white. One black family, or even one jewish family, on your block, lowered your color code. And then add that 90% of all FHA loans from 50’s to early 70’s were offered only to whites…IF they moved out of the cities. Red lining didn’t come from ‘banks’. It came from our government. Other suggested books: Family Properties by Satter …Sugrue’s Urban Crisis, Also the Moses book Power Broker details how tens of thousands of white people were pushed out of the Bronx,and other areas of NY, when they wanted to stay. Huge mixed neighborhoods were destroyed.
Beautiful, again.
NY speculators tried selling services in midwest before S&L debacle and were run out of town. Maybe we weren’t as gullible then.
The NYT is listing some conversion apartment in the WS area at over $1.5M each for smallish sq ft, genetic design. Not sure the market will absorb all the upcoming inventory. In the same area, retail space is chronically empty. Yet Mayor NYC Adams and some builders are still pitching new office construction with amenities such as retail space, and gyms – shades of scammers
. Go figure.
“The Railway Exchange Building was the heart of downtown St. Louis for a century. Every day, locals crowded into the sprawling, ornate 21-story office building to go to work, shop at the department store that filled its lower floors or dine on the famous French onion soup at its restaurant.”
The department store was Famous-Barr (later Macy’s). I remember it well, especially their onion soup.
I grew up in St. Louis. At Christmas time, the downtown stores had wonderful Christmas displays in their windows and we would make the annual trip to visit.
For a time, I worked in what was known as the Darth Vader building that was near the old ballpark. I spent many evenings with my Dad at the old ballpark. He was a great Cardinals fan.
sigh
great memories
They say that they need individual bathrooms and kitchens to convert these high rises. In college I lived in a fraternity house and we all slept in a huge room that was called the dormitory. There was one bathroom with a couple of toilets. We ate in a communal dining room and we had a cook and cleaning and serving team. Young guys are not particularly concerned with cooking for themselves. I own a facility now for mildly mentally retarded and we have to feed and heat and cool and clean up and transport our clients for less than what a kennel charges for a dog…..per day. That is what SSI pays. We have communal dining. I suppose we could do what we do in a floor of a NY office building as well. So with millions of young male immigrants crossing the border it seems that putting them up until they get jobs and meet women and have kids could be done in high rises without a lot of conversion. Just put bunk beds in and there are toilets in the central column. Just like American kids do in a frat house and the immigrants are the same age group. While there are some women and children separate facilities could be set up for them. Set up a dining hall and I read that Mayor Adams is paying 20 dollars per day to contractors per immigrant for laundry services already. I served in Iraq and Afghanistan in the military and until we built fixed facilities that living in large dormitory areas was standard. I think they have dormitory housing at places like Foxconn where they make I phones. Converting to million dollar apartments is probably not going to work. Most Americans who can afford it want out of the city for all the usual reasons. For the immigrants this sort of communal housing would be better than what they had at home. Many old apartment houses in Greece and Turkey have shared bathrooms for multiple tenants and shared cooking areas as well. That 44 story high rise in St. Louis could be home to thousands of immigrants. That would eventually provide a nucleus of people that would provide a way to revitalize the city.