“We aren’t going to have really high-density downtowns if we have work from home as we do now. I think it’s permanent that, on average, most office staff from these high-density areas will get at least some work from home every week.”
Joseph Gyourko, PhD, Professor of Real Estate, Finance, Business Economics, and Public Policy, Wharton School of Business at the University of Pennsylvania
The Covid-19 pandemic has caused a dramatic shift in the way we work. With many businesses transitioning to remote work, office spaces worldwide have become largely empty. This begs the question: what will happen to these post-pandemic empty offices?
It’s difficult to say precisely how many commercial office buildings are still empty post-pandemic since it varies from place to place. It depends on factors such as if businesses return to physical offices they still have leases on and how successful building owners will be at finding alternative uses for their properties. However, it’s clear that a large amount of unused office space still needs to be addressed if downtowns want to look like they did pre-pandemic.
Downtowns have traditionally been essential to the functioning of many cities, towns, and communities. They provide a central hub for business, culture, and entertainment in an area while also serving as a gathering place for people to socialize and shop: “Downtowns are efficient. The reason we have downtowns is we can get a dense agglomeration of people and firms, and that’s productivity-enhancing,” shares Dr. Joseph Gyourko, a real estate professor at the Wharton School of Business at the University of Pennsylvania. “Work from home has shown us that downtowns are not as productive or as necessary as we thought.”
“What Covid did was it made the workforce and employers aware that they could run their firms without people being at work all the time. We used to think you had to have everyone in the office, or they would all be lazy,” says Dr. Gyourko. “Before Covid, relatively few companies did work from home, but suddenly everybody had to implement work-from-home policies in 2020, and it turns out that it works. Now a lot of the workforce wants at least some work from home.”
Experts believe this change is going to be long-term. Keep reading to learn more about what Dr. Gyourko believes will be the prognosis for these empty office spaces.
Dr. Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate, Finance, and Business Economics & Public Policy and the Nancy A. Nasher and David Haemisegger Director of the Zell/Lurie Real Estate Center at Wharton School of Business at the University of Pennsylvania. He has taught at Wharton since 1985 and has been a frequent consultant on commercial and real estate market analyses. He earned his PhD in Economics from Harvard University and his BA from Yale University.
Dr. Gyourko’s research focuses on urban economics, housing economics, housing finance, commercial real estate markets, public finance, and macroeconomics. His work has been published in numerous journals, including The Journal of Economic Perspectives and The American Economic Review. He is also a member of the National Bureau of Economic Research (NBER) and a fellow at the Centre for Economic Policy Research (CEPR).
For the past six years, Global Workplace Analytics has published a report on the state of remote work. The 2022 study found that interest in traditional in-office work dropped 24 percent since 2021, with hybrid work and entirely remote work increasing by 16 percent and 24 percent, respectively. “Very few businesses have been able to come back to a full five days in the office. Obviously, some jobs never went remote, like emergency room physicians. But the rest of us have kept some remote work every week,” says Dr. Gyourko.
He continues, “What that means then is that there aren’t as many people in the office, and while that reduces the demand for office spaces, I think the more serious longer-term threat is what it does to the neighborhood businesses that grew up around what used to be full offices. Many people are only in the office three or four days a week. The restaurants, hotels, and the like are in real trouble because they don’t have a full workforce to serve five days a week. It’s a real problem. And it’s a threat to cities as a result.”
The shift in office real estate is still relatively new, so experts aren’t sure what will happen long term: “Ultimately, it’s too early to tell what will happen. We do know that it can’t be good for these downtown areas. However, it will be good for the areas where these remote workers are. So let’s say you’re in the suburbs and not coming in two days. You probably don’t want to eat in your kitchen every day, so areas will have to develop amenities like decent restaurants and other services remote workers want,” says Dr. Gyourko.
“One of the reasons it’s still too early to tell is that office leases tend to be multiple years, so we’re just starting to see the effects now as people roll over their leases and decide they don’t want the space anymore or want less space because people aren’t in five days a week,” remarks Dr. Gyourko. One thing that is known for sure is that the quality of the office space will have a significant role to play. “We’re starting to see a real bifurcation in building quality. The best office buildings still have good demand and can charge decent rents. If the building is not among the best because it’s old, has low ceilings, or it is hard to upgrade the HVAC, it will be in much bigger trouble. This shift won’t affect all buildings the same,” he says.
A study published in November of 2022 by three business professors at Columbia and New York University estimates a 39 percent decline in the value of office buildings in New York City and a $413 billion value destruction of office real estate nationwide: “Higher quality buildings were buffered against these trends due to a flight to quality, while lower quality offices are at risk of becoming a stranded asset. These valuation changes have repercussions for local public finances and financial stability,” said the researchers in this study.
“I don’t see an easy way out,” notes Dr. Gyourko. “I think that places like New York, San Francisco, and probably Seattle, which have high residential rents, will be able to transition some of their buildings to housing or other uses. Residential rents are probably high enough that developers can afford to convert those buildings to high-end apartments with high enough rent that they will need relatively little subsidy.”
However, owners will need help repurposing buildings in lower-rent markets. “Everyone else, including my hometown here in Philadelphia, will need subsidies to make the transition work. The question is, where do the subsidies come from?” asks Dr. Gyourko. “Right now, we just don’t know. I think it’s too big a number for individual cities to subsidize. Overall, these buildings are less valuable going forward, which is not the end of the world, but it is a meaningful change.”
Many solutions are being proposed for vacant office spaces: “What you hear talked about a lot is to transition them into residential units. That will work sometimes, but not in most. Repurposing a building from office to residential is really expensive. In a market like Philadelphia, it’s almost certainly a few hundred dollars per square foot to change a space from office to residential,” offers Gyourko. “You don’t need running water and a flush toilet in every office, but you do in every apartment. Most people won’t rent an apartment without a water hookup. I believe you’ll be able to transition some offices in expensive coastal markets to residential, but I don’t think it’ll work in many other places because it’s too expensive.”
According to a 2022 New York Times article, there are over 998 million square feet of office rental real estate without a tenant, while the National Low Income Housing Coalition reports that only 36 low-income rentals are available for every 100 low-income families. At a glance, turning those empty spaces into low-income housing makes sense. Unfortunately, it’s not that easy: “It’s not going to happen without a big subsidy. Developers can do it if they have the revenue source, but otherwise, they won’t. I don’t see that happening without a higher level of government intervention. It’s just too costly,” says Dr. Gyourko.
“Ultimately, I think this will be a widespread enough problem that we will want to help the transition. Higher levels of government will get involved, but not till they see disasters happen,” shares Dr. Gyourko. As the values of these less desirable office spaces drop, the math will get closer to penciling out for conversion.
The few office buildings being converted into residential living spaces are rarely just apartments. Developers are creative in crafting multi-use spaces that include retail, gyms, and co-working to lure people back into downtowns. “It needs to be more than just housing. You can change the nature of the amenities to make the area more attractive. Add more parks or other things that people like and would draw people in to keep the density high,” suggests Dr. Gyourko.