What To Do With All The Empty Offices In U.S. Cities | CNBC Marathon

CNBC

24 Jan 202433:04

EducationalLearning

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TLDRThe COVID-19 pandemic triggered a rise in remote work and exacerbated San Francisco's office vacancy problem. With over 27 million square feet of vacant office space, the city is exploring solutions like converting empty buildings into housing to address housing shortages. However, obstacles like construction costs and policy barriers make office conversions challenging. As cities reinvent themselves, San Francisco aims to convert offices into residential units, but feasibility depends on financial incentives and regulatory changes to enable more housing development.

Takeaways

😨 Early in the pandemic, remote work led to a large drop in office demand, causing issues for building owners and cities
😥 The 'urban doom loop' refers to falling property values reducing city tax revenue, forcing cuts to services and driving people to leave
🏙️ NYC could see a $4B budget shortfall if commercial property values drop 40%
💸 Banks face rising defaults as building values fall, tightening financing for other businesses
📉 Publicly traded real estate investment trusts have lost 50-70% in value recently
👷‍♂️ Only ~10% of office buildings are suitable for conversion to apartments
🏘️ Repurposing obsolete office space by adding housing, medical, entertainment or hospitality could help cities
🔨 Strict policies, long permit processes and high construction costs limit housing development in San Francisco
💲 Financial incentives could encourage office-to-residential conversions to help address housing shortages
🏙️ Despite current challenges, San Francisco's economy and real estate market have repeatedly reinvented themselves

Q & A

What is the urban doom loop and how does it impact cities?
-The urban doom loop refers to the downward fiscal spiral cities can experience when office vacancies reduce property taxes, forcing cities to cut spending on services and infrastructure, making the city less attractive for residents and businesses, further reducing property values and tax revenues.
What percentage of tax revenue in New York City comes from commercial property taxes?
-Commercial property taxes account for about 10% of all tax revenue in New York City.
Why are smaller regional banks facing a credit crunch?
-As commercial property values fall, landlords may default on loans or walk away from buildings. This deterioration in the credit quality of commercial mortgages on regional banks' books is causing them to tighten lending standards more broadly.
What percentage of office buildings are estimated to be physically suitable for conversion to apartments?
-Only about 10% of office buildings are estimated to be physically suitable for conversion to apartments.
How much commercial real estate debt is estimated to come due in the next couple years?
-There are trillions of dollars of commercial and office debt expected to come due in the next couple years.
What was the office vacancy rate in San Francisco before the pandemic?
-San Francisco had an office vacancy rate of about 4% before the pandemic.
What are some barriers developers face in converting offices to housing in San Francisco?
-Barriers include high construction costs, lengthy approval processes, affordable housing requirements that affect project financials, and zoning laws that limit conversions.
What percentage of Calgary's downtown office space was vacant before the pandemic?
-Calgary had a 38% office vacancy rate even before the pandemic.
How are cities like New York trying to incentivize office to housing conversions?
-New York has experimented with zoning rule changes to make conversions easier. Some cities are considering increased tax breaks for developers who convert office buildings to housing.
What percentage of recent office conversions in the US have been office to lab space?
-46% of recent office conversions in the US have been from office to lab space.

Outlines

00:00

😕 San Francisco's downtown office vacancy crisis

Paragraph 1 discusses the high office vacancy rate in San Francisco's downtown area, which started early in the pandemic as workers shifted to working from home. This has led companies to downsize and not renew leases, reducing demand and revenues for office building owners.

05:02

😯 Converting offices to apartments has challenges

Paragraph 2 explains that while converting vacant offices to apartments may seem like an easy solution, it has many challenges. Factors like building layout, access to light, location of plumbing lines make conversions difficult and expensive.

10:03

😣 Office vacancies negatively impact city budgets

Paragraph 3 talks about how high office vacancy rates can negatively impact city finances and budgets. With less demand for offices, property values and tax revenues fall, forcing cities to cut spending on services.

15:05

🤔 Calgary leading office-to-housing conversions

Paragraph 4 discusses Calgary's initiative to convert vacant downtown office buildings into housing units, increasing the population density of its urban core. The city's program provides incentives and streamlines permitting to enable conversions.

20:07

🏙️ Barriers blocking housing construction in San Francisco

Paragraph 5 covers the various barriers making it difficult to build more housing in San Francisco, including high construction costs, affordable housing requirements, and a complex, lengthy permitting process. This drives up prices for residents.

25:09

⏰ SF housing policies must adapt quickly

Paragraph 6 urges San Francisco to make changes quickly to its housing rules and requirements to meet housing construction targets. It suggests the city be open to reducing affordable percentages to incentivize building faster.

30:09

😨 Urban doom loop threatens city budgets

Paragraph 7 explains the urban doom loop theory - office vacancies reduce property values/taxes, shrinking city budgets to cut services, prompting people to leave, further reducing revenues. This downward spiral particularly threatens tech hub cities.

Mindmap

Keywords

💡office vacancy

The video focuses on the high rate of empty and unused office space in major cities like San Francisco. Office vacancy refers to the percentage or amount of total office space that is unoccupied or not being used. The video explains how office vacancy rates have risen dramatically during the pandemic as companies downsize their spaces or allow employees to work from home.

💡urban doom loop

This refers to the damaging spiral or downward trajectory cities can experience when falling demand for office space leads to lower property values and tax revenues, forcing cities to cut back on services, infrastructure, etc. This makes cities less appealing places to live and prompts more people to leave, further reducing property values and tax income in a reinforcing loop.

💡office conversion

With high office vacancy rates, one proposed solution is converting unused office buildings into other needed types of spaces like apartments. Office conversion refers to the process of transforming and retrofitting office spaces into new uses like residential housing units. However, the video explains this is easier said than done.

💡housing crisis

Many major cities like San Francisco also face crises regarding lack of affordable housing supply. Converting vacant offices to apartments could help increase housing availability. However, constructing new affordable housing or converting offices comes with many financial, zoning, and regulatory barriers.

💡remote work

The rise of remote work policies during COVID-19 is a major driver of increased office vacancy rates. With many office workers now working from home substantial parts of the time, demand for downtown office space has fallen drastically in many cities.

💡property taxes

Cities rely heavily on revenues from taxing commercial real estate properties. When property values fall due to lower demand, cities collect less revenue, forcing budget cuts to vital services. This dynamic is key to the urban doom loop.

💡zoning policies

Outdated zoning regulations often prohibit or discourage converting offices into residential spaces, or make adding housing density difficult. Updating local zoning policies is one way cities can facilitate more office conversion projects.

💡construction costs

High materials and labor costs present obstacles to most new real estate development, especially affordable housing projects which have tight budgets. Rising construction costs make both office conversions and new housing relatively unprofitable.

💡real estate debt

The video discusses risks of refinancing commercial real estate loans (taken out pre-pandemic) after property values fall. Banks also face risk from defaults on office building mortgages. This can reduce availability of credit/loans for local businesses too.

💡repurposing

Instead of conversion to housing, cities can repurpose vacant workspaces for other uses like medical offices, entertainment, retail, or hospitality spaces. Creative repurposing of excess office inventory helps reduce vacancy issues.

Highlights

Early in the pandemic, office workers started working from home, leading to reduced demand for office space and companies downsizing or not renewing leases

The decline in office demand has reduced property values and tax revenues, forcing cities to cut spending on services, making them less attractive places to live

This spiral of declining property values, tax revenue, spending, and migration out of cities is called the "urban doom loop"

In New York City, commercial property tax makes up 10% of total tax revenue - a 40% drop in values could create a $4 billion budget shortfall

Remote workfriendly tech sector cities like San Francisco and Seattle are most vulnerable to the urban doom loop

As office values fall, landlords may default on loans or walk away rather than inject more equity, leaving banks owning devalued buildings

Banks then tighten lending to other sectors, creating a credit crunch affecting local businesses

$5 trillion in commercial real estate underpins pensions, REITs, and investments - declines affect more than just landlords

Office vacancy rates are 30% below pre-pandemic levels; $ trillions in debt coming due as few offices fully reoccupy

Too much office space is the core issue - we must repurpose the excess, like converting offices to apartments

But only 10% of offices are suitable for residential conversion due to large floor plates and layouts

Other options include converting offices to medical, entertainment, hospitality, or other spaces

Cities have reinvented themselves before; converting obsolete offices is the next urban challenge

In San Francisco, the office vacancy rate jumped from 4% pre-pandemic to 25% currently

San Francisco faces a $700 million budget deficit from empty offices and closed businesses

Transcripts

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