Commercial real estate is in crisis throughout North America. This presents an opportunity for the mass conversion of commercial buildings, which could help address the housing crisis and create better cities in the process.
Building for lease in Edmonton, Alberta, on January 15, 2021. (Artur Widak / NurPhoto via Getty Images)
Commercial vacancy rates in North America are hitting new highs. By late last year, 19.6 percent of office space in big cities in the United States was empty. The final quarter of 2023 saw similar numbers in Canada, with 19.4 percent of downtown commercial space left unrented.
Last year, some of the usual corporate suspects peddled optimism about return to work, prognosticating that the office would soon be back to normal — but their wishful thinking didn’t exactly pan out. Anyone invested in commercial real estate certainly had an interest in believing, and arguing, that a return to the old days and old ways was just around the corner. It turns out their predictions were more in hope than expectation.
The Great Office Exodus
Vacancy rates for commercial purposes differ among cities due to various factors. For example, according to CBRE, new supply drove much of the recent vacancies in Toronto, with buildings outpacing demand to fill them. There are also ongoing conversion plans and programs aiming to repurpose unused office space into housing. But these are reducing vacancy rates by removing space from the commercial market.
Both Canada and the United States are struggling with housing crises, particularly in metropolitan areas, which is partly why many welcome the shift. The tension between new supply going unused and old supply being converted or left vacant suggests the commercial real estate market is struggling for balance, particularly as capital-heavy projects launched years ago, in a different world, approach or reach completion.
Factors such as a weak economy, a softening tech sector, high interest rates, inflation, and the rise of remote or hybrid work contribute to the increase in vacancy rates. And while the economy may turn around in 2024, workers are fighting to preserve remote and hybrid working arrangements for the long term.
High vacancy rates offer opportunities and challenges. The end of the office is a welcome development for many workers. It isn’t preferred by everyone, but it’s evidently the choice of the majority. A 2022 Gallup poll found that more than seventy million Americans could work remotely and do their jobs perfectly well. The poll also found that 60 percent of workers wanted a hybrid arrangement while just 6 percent wanted to work on-site all the time. Data from Pew Research Center in the spring of 2023 indicated a substantial increase, with 35 percent of workers opting for remote work, significantly up from the 7 percent before the pandemic in 2020.
Remote work is popular and comes with benefits. Free time that used to belong to commuting can be repurposed, encouraging fewer hours — directly and indirectly — dedicated to working for the man and more leisure time spent with family and friends or in pursuit of personal hobbies or interests.
Averting the Fate of Urban Industrial Zones
The shift also represents a power shift insofar as workers are demanding and getting remote work arrangements, and those who don’t get it are happy to look for work elsewhere. However, not everyone can work remotely. Many jobs can’t be done from home. The service and manufacturing industries are largely rooted in physical space, as are jobs that support the maintenance and running of physical buildings.
Vacant commercial space has repercussions for working-class jobs. And with the decline of the office, there is a risk that downtowns could be (further) hollowed out, along with supporting industry. This shift could parallel the decline of urban industrial zones, which, upon their death, took good paying union jobs with them.
On the other hand, empty office buildings could help ease housing prices. Converting commercial property into homes is a popular but tricky enterprise. Not all buildings are suitable for residential use, even with conversion efforts. However, many are, exemplified by a former medical building in Winnipeg that underwent conversion a few years back, opening over a hundred units to the rental market.
Converting office space into homes could be an enormous advantage to cities, provided that residents could still have jobs and afford the rent. Additionally, the process is capital-intensive. There is a role for the government in funding the transition, and national and subnational governments are doing some of this work already. Data from Sweden reminds us that the state can and does create work, balance worker power, and ensure decent wages. It hasn’t been that long since the US Works Progress Administration managed similar feats on this side of the Atlantic.
If, on the other hand, we entrust the conversion process to private developers alone, we risk losing these benefits entirely. Private market interests are fickle and ultimately uninterested in the public good. At best, they only address the public good as an afterthought — a means to enhance the goodwill value on their financial statements.
Making the Most of Conversion
The Canadian government has already planned to convert some of its own properties in Ottawa into homes and is working to smooth a regulatory path for developers to make the transition, but that process is stuck in bureaucratic mire. The Biden administration is offering low-interest loans to finance conversions. Ideally, the state itself could undertake the work and a program of developing nonmarket units and otherwise affordable units. Calgary managed such a feat back in 2021.
Finally, the transformation of downtown real estate requires a concurrent transformation of urban space itself to match the new use. The urban landscape needs to prioritize safety, walkability, and the provision of essential amenities for residential tenants, including schools, parks, community centers, and places of worship. In some case, downtown locations already meet these needs, in others, they don’t. Conversion projects ought to proceed with this in mind.
Swapping commercial space for residential space has the long-term potential to be a transformative, net good. Empowering workers to choose how they work and from where is a welcome shift, as is easing the housing crisis, particularly to the extent the public is involved in projects and keeps an eye on nonmarket and low-cost options. But the decline of the office will also threaten middle- and working-class jobs, which is why state leadership in development, job creation, and transferring power to workers is critical. It will also require an effort to prepare urban spaces to meet the needs of residents.
In the long run, the opportunity to rebalance commercial and residential space should be welcomed. But the details will matter. As ever, there is a serious risk that the most vulnerable are left behind, even if many conversion advocates have the best of intentions — and surely, not all do.Original post