Business districts have a vacancy problem. The white-collar workers in the United States who fled inner cities at the start of the pandemic have not yet all returned. Even though some big employers like Google and Apple are starting to roll out back-to-office policies, it looks like many of them will never return.

According to data from a Gallup survey, more and more American companies are embracing remote or hybrid working and reducing their footprint in the office. As a result, office buildings in major US cities are experiencing the highest vacancy rate for downtown office space in about 30 years.

Across the 10 major U.S. metropolitan areas, downtown vacancies are on average 4% higher than pre-pandemic levels. In sprawling Texas cities like Houston and Dallas, where office construction has boomed despite a surplus of outdated buildings, offices were empty even before the pandemic. Now, more than two years into the pandemic, about a quarter of downtown offices are vacant.

Remote work has reduced the role of the office

Covid-19 has accelerated the trend for American workers to need less office space as the nature of American white-collar work has changed. While companies have used strategies like office sharing and installing co-working spaces to use space more efficiently, the number of square feet needed per white-collar worker has steadily declined over the past few decades.

This is likely to continue. Even as business districts begin to recover, Gallup estimates that 37% of current office space in the United States will likely be abandoned as workers shift to remote working. This could reduce tax revenue and economic activity for cities. A study of eight cities by the Institute for Taxation and Economic Policy found that the loss of tax revenue from commercial properties could result in budget shortfalls of between 5% and 7%.

Faced with millions of square feet of vacant office space, cities are exploring new uses by converting office buildings. Some are targeting new condos and apartments, taking advantage of the prime location of many office buildings to increase the supply of dense housing. Other cities are creating industrial spaces, capitalizing on the e-commerce boom that has emphasized warehouses. These efforts to repurpose and repopulate city centers have the potential to upend assumptions about how cities are designed.

Meet demand for warehouses

Urban offices are particularly attractive for e-commerce businesses. Because they are already located closer to where people live, they provide an ideal solution to last-mile delivery challenges, despite increased heavy truck traffic and other industrial activity near homes. Amazon and other retailers have started scooping up warehouses in once-industrial neighborhoods that are now residential.

Building warehouses (not removing them) was already common practice in dense places like Tokyo and Singapore. The trend is finally coming to the United States as developers turn outdated office and retail space into warehouses, primarily for e-commerce products. In 2016, warehouse industry giant Prologis built a multi-story warehouse in Seattle, a first in the United States. Warehouses have been converted from former office buildings in suburban Chicago and Somerset, New Jersey.

More are expected as Amazon and other e-commerce sellers jostle for more space to meet increased demand for goods from online shoppers. In 2021, typical rental prices for warehouses in the United States and Canada increased by 18% compared to the previous year.

Transform a workspace into a living space

The conversion of office buildings into condos and apartments has also been common for decades, but almost all of these redevelopments have occurred on a case-by-case basis. Developers got approval for a few high-profile conversions they thought would pay off, such as iconic downtown Los Angeles art deco offices converted to apartments in the early 2000s and the Trump International Hotel and Tower in Manhattan. , formerly the Gulf and Western office building. .

REUTERS/Brendan McDermid

The Trump International Hotel and Tower in New York City had a previous life as an office building.

But now cities, often at the behest of the real estate industry, are considering approving larger-scale conversions. In March, New York Governor Kathy Hochul and Mayor Eric Adams both expressed interest in converting Midtown Manhattan office buildings into apartments. Hochul’s state budget proposal included a proposed residential building law revision that would facilitate the conversion of office space. At a public hearing in March, Eric Adams’ chief planning officer, Dan Garodnick, said the administration was considering conversions as a potential solution to creating more affordable housing in the city. The New York City Council passed a law in 2022 requiring the city to “investigate options and make recommendations” for commercial buildings that could be converted into apartments.

A 2021 study found that converting just 10% of buildings in the area could create 14,000 new apartments. A similar Los Angeles County study conducted in April 2022 found that hotel and office conversions could add more than 72,000 units to the area’s housing supply.

The problem is that no two buildings are the same, and not all are easily converted into residences, says Dr. Tracy Hadden Loh, a fellow in the Brookings Institute’s Metro program. Office buildings are often not built with the proper light and space requirements needed to meet building code standards for living spaces like bedrooms. “A lot of these outdated offices have weird dark spaces inside, which means adapting them is tricky because different cities have different building code requirements,” says Loh.

This means that conversion projects can quickly become expensive. A study (pdf) of adaptive reuse projects in California found that they tended to be more expensive than new construction and tended to incur unforeseen expenses in the construction process. The redevelopment of an office building in San Francisco involved almost completely rebuilding the structural frame to bring it up to earthquake-resistant standards and redoing the facade because it had no windows that opened.

Facilitate office conversions in cities

That means the massive conversion of office buildings won’t happen on its own, says Matt Vance, senior economist and head of multifamily research at CBRE. A combination of factors must come together to make these conversions profitable for developers: an attractive location and floor plan, favorable zoning laws, and up-front financing for the deal.

Vance argues that local governments must help identify and fund these conversion projects. “In some ways, it seems inevitable that we need to rely on a public-private partnership system,” says Vance. “[Partnerships] might make sense if they could get people back to those parts of town [that are now business districts]and provide them with the residential option and commercial amenities that today’s tenants are looking for.

The momentum of conversions is accelerating. A report by RentCafe found that in 2021, US cities saw more than 150 apartment conversion projects, and 41% of them were from former office buildings. In total, around 7,400 apartments were created from office conversions in 2021, more than six times the number of units created a decade earlier.

Adapting buildings to meet demand for how people want to use them will be a necessary part of how cities adapt in the future. “There will be cities in the future, and those cities won’t be filled with haunted ghosts of empty office buildings,” Loh says.