Are downtown central business districts finally coming back after Covid-19? Although there are some signs of recovery, many cities are still struggling. The long-term future of downtowns is tied to how much working from home becomes permanent, and that’s still in flux. But a full return to pre-pandemic occupancy levels is very doubtful.
The picture remains cloudy for cities. Two recent headlines underscore the lack of clarity.
The New York Times
NYT
reported New York City faces a “potential fiscal crisis” due to a possible $10 billion budget deficit, driven in part by the drop in commercial office occupancy. They say the “city’s commercial office market is on the precipice of a potential work-from-home abyss” that hurts tax revenues and reduces job creation for many lower-paid service workers in restaurants, building services, and other jobs.
But the Wall Street Journal reports “return-to-office rates” at a “pandemic high as more employers get tougher.” Using Kastle Systems’ Back to Work Barometer, which estimates office use based on keycard entry swipes, the Journal says office use is rising as “more employers get tougher.”
Remember that the future of downtowns rests on the level and permanence of working from home (WFH) as opposed to the office. Although we still don’t know how big and how permanent that change will be, it’s clear the pandemic caused a big jump in WFH.
As the macroeconomic impact of the pandemic eases, job locations are the key for cities. Even with the Federal Reserve trying to induce a recession to fight inflation, jobs continue to grow. Nationally, employment grew by 315,000 jobs in August with an unemployment rate of 3.7%.
Private sector employment is now higher than it was at the start of the pandemic, although public sector jobs haven’t fully recovered. And the jobs recovery is uneven, with Black and Hispanic unemployment rising under the pressure of the Fed’s interest rate hikes.
But more high-paying office jobs now are being done from home. We don’t have good data on office-based work. Kastle System’s “barometer” is reported frequently, but keycard swipes are a very imperfect proxy for office occupancy. Those data get reported in part because we haven’t got anything better.
And the Kastle numbers aren’t really that huge. The Journal correctly notes the barometer just hit its highest point since the pandemic. But the most recent average for ten major metropolitan areas is 47.2%, still under 50% occupancy. And only three metros in the Kastle index are over 50%, all in Texas.
New York jumped by almost 9% after Labor Day, but still comes in at 47% occupancy. And San Francisco (41%) and San Jose, California (39%) bring up the rear, with their higher concentration of tech workers now working remotely.
Other data underscore the overall slow recovery of offices. Commercial Edge has new data showing the average listed rent for full-service offices is stagnant, “down 0.1% year-over-year.” There’s significant national variation, with Boston rents rising by 17.7% in one year, driven by its strong life sciences sector which uses lab space along with offices.
This report sees slower overall growth in office construction, both from lower demand and also significantly higher interest rates. But again there’s variation, with some cities showing double-digit rates of office space under construction and planned. These include Austin, Texas (24.7%), Charlotte, North Carolina (16.9%) and Boston (12.2%).
The main issue facing commercial real estate, and thus traditional downtowns, remains the depth and persistence of working from home. While we don’t know the full impact yet, it’s unlikely existing office jobs will ever return entirely to downtowns.
Cities may adapt both their central business districts and some of their existing office stock to more housing, or hybrid live-work spaces, attracting new higher-income residents. That’s easier said than done, as office conversions are technically complex and some cities lack vibrant amenities that could lure younger workers.
But cities will have to explore these and other options to revive their downtowns. While office-based work may continue trending upward, a 50% occupancy rate isn’t a return to normal or a solid basis for future fiscal health.