The ‘office apocalypse’ is upon us,” proclaims a recent Business Insider article. It’s one of many with a similar message: U.S. cities are in deep trouble. Commercial real-estate values in half-empty big-city downtowns are cratering, taking property-tax revenues with them. Flummoxed local governments are looking for solutions. The most obvious remedy—residential conversion of surplus office space—has been slow to materialize. Finding ways to boost population and employment enough to refill downtown offices might be a better option, particularly where restrictive building rules have suppressed growth for decades. Local governments should view the decline in downtown office values as an opportunity, not a catastrophe.
If many firms really can run productively without a five-day-a-week employee presence in the office, that will represent a wrenching structural change in the economy—comparable with the post–World War II shift in manufacturing and goods distribution out of cities to peripheral locations in metropolitan areas, low-cost Sunbelt states, and low-wage foreign countries. Many cities adapted to those economic upheavals, as well as the concurrent loss of jobs, by dramatically boosting employment in services. This included the expansion not only of financial, professional, and business services but also of health care and higher education.
The boom in services changed the physical fabric of cities, as an increasingly professional labor force needed suitable workplaces. The prototypical work environment of the postwar service economy was the large-floorplate office building: a glass box with open-plan cubicles, surrounding a central core of elevator banks and fire stairs.
Those large-floorplate office buildings, built mostly from the 1960s to the 1980s, are the prime victims of the office apocalypse. Older buildings, designed for floors to be split up for multiple tenants, often have tower floors with sufficiently narrow configurations to be converted to attractive apartments, and many cities took advantage of the opportunity. The postwar glass boxes, with 40- to 45-foot dimensions from the elevator core to the exterior walls, were designed to meet the needs of large corporate tenants. That necessitated much deeper building footprints than typical high-rise apartment buildings. Converting such structures to apartments results in awkward layouts and potential conflicts with local building codes, such as windowless bedrooms. Unattractive apartment configurations will struggle to achieve the rents or sales prices that owners need to make residential conversion feasible, even compared with devalued office space.
How, then, can local governments confront the office apocalypse constructively? First, by letting their populations grow, commensurate with the strong demand for housing. Many large U.S. cities, particularly on the coasts, have suppressed housing supply through restrictive regulations. Housing prices and rents have subsequently risen much faster than incomes, effectively “pricing out” many people who want to move there. The need to recover tax revenues lost from declining office-space values creates a perfect excuse to unblock housing supply. New residents would ignite a demand for expanding services employment, as well as increasing the labor force, enabling expanding service businesses to help fill vacant offices. The rise in office-using jobs will push buildings closer to full occupancy, though the space-per-employee standard has dropped significantly, due to workplace-sharing by employees who are present in the office only part of the time. As a bonus, population growth will also restore the finances of cash-strapped urban transit systems, according to the Niskanen Center’s Alex Armlovich.
Efforts to spur the creation of new housing shouldn’t focus only on downtown, but they shouldn’t neglect it, either. A 24/7 downtown, where people both live and work, is more likely to include amenities like full-service restaurants, health clubs, and pedestrian spaces that attract businesses and workers who might otherwise stay home.
Realizing these objectives will require a careful examination of how zoning and other rules affect both new construction and the conversions of older and smaller commercial buildings to residences. In New York, for example, city officials are considering changes to residential-conversion rules, which limit conversions by the age of the building and by location. Additionally, New York governor Kathy Hochul has proposed that the legislature both facilitate conversions and lift the state’s statutory cap on the size of residential buildings, which keeps new residential buildings in midtown and lower Manhattan smaller than office buildings are permitted to be—a rule that makes no sense if fostering a mixed-use downtown is the goal.
Some of the best sites for new downtown housing are parking lots and parking garages. With ample transit capacity available at peak times, the public has even less reason than before Covid-19 to drive downtown. Cities can help discourage driving by eliminating off-street parking requirements for old and new buildings and by assigning more street space to bus and bicycle lanes or to pedestrian use.
Having surplus office space in a city that’s still a magnet for newcomers and the businesses that want to employ them is not a bad situation. But local governments need to take the necessary steps to fill the space, stabilizing real-estate values and property-tax revenues. Easing the constraints on housing and allowing the population to grow to meet the newly increased capacity of the commercial building stock and transportation infrastructure are the best routes to this objective.