Jason Fudin, CEO and Co-Founder of Placemakr.
Office properties play an essential role in our cities. Their real estate taxes alone help provide a great deal of the funding for our thriving metropolises.
So, it’s vital that these properties maintain—or better yet, increase—value for our cities to continue to flourish. But here’s the kicker: The value of these properties is directly tied to where people work, how they commute and how much they make. So, you can imagine my shock when I read The Wall Street Journal article, “Home Buyers Are Moving Farther Away Than Ever Before.”
In summary, people chose to move an average of 50-plus miles away from their previous homes in 2022. Why is this significant? Well, it’s never happened before. And the secondary impacts of this mass exodus could hit our cities the hardest if we don’t rethink how we utilize these office buildings—and quickly.
Redefining Urban Dynamics
The Wallstreet Journal data makes one thing evident: Employees are convinced that remote and hybrid work is here to stay. While the jury may still be out on how this new office setup will pan out, people seem confident enough to commit to hour-plus commutes.
For the sake of argument, let’s assume this remote/hybrid office structure is indeed here to stay. If people aren’t heading to the office five days a week, what’s going to happen to our urban cores? Office and retail properties, especially Class B and C buildings, are likely to experience a steep decline in value as tenants reduce their footprint, leading to more vacancies and lower property values.
This, in turn, means fewer real estate taxes to fund crucial public works projects and services like police, public schools and street maintenance, ultimately decreasing the desirability of neighborhoods. With less foot traffic for retail, there will be fewer retailers and lower residential demand. To maintain vibrant downtowns, cities will have to lean on innovation and reconsider how these office spaces can and will function in the future.
Recognizing The Problem
So, where do we start? The first step to solving any problem is to recognize you have a problem. And our cities have a major problem. I believe the heart of the issue is the inflexibility of buildings and the lack of diversity in the types of buildings downtown.
Downtown cores are often designed for a singular purpose: Office space. We now know that assuming this rigid structure will maintain its demand in its current form forever, especially in a post-pandemic era, is a fool’s errand. If the pandemic taught the CRE industry anything, it’s the value of flexibility and diversity in meeting consumer demand and market dynamics. In short, these buildings need to flex their function to serve today’s needs.
Creating Flexibility In Real Estate
So, what does flexibility in real estate look like? It’s about making properties multifunctional, capable of transforming from one use to the next.
My favorite example of this, and a type of real estate asset my company helps curate, is combining multifamily and hospitality use into one property. Picture this: A developer converts an existing office space into apartments that can also function as a hotel. By having two uses within a single building, it becomes more capable of meeting evolving consumer demands.
During peak travel seasons, a portion of the property can operate as a hotel, capitalizing on lucrative transient business, while the remainder of the year, the apartment units can serve as short-term or longer-term rentals. With this capability, a property can adjust to market dynamics, making it a more sustainable and resilient asset.
I also believe that the blending of co-working and conferencing presents a natural solution to the evolving needs of office workers. Groups like Convene or Industrious have already begun transforming buildings for this specific purpose, introducing flexibility and diversity into the traditional monolithic office spaces. As remote or hybrid work continues, I am certain that reimagining how we “lease” or “rent” office space—shifting towards an on-demand model—will undoubtedly help companies gain an advantage.
This flexibility in downtown commercial real estate can be embraced by other industries too. An example that comes to mind is Nimbus and Future Foods. They are embracing flexibility and rethinking how commercial kitchens function and reach audiences in downtown markets. The premise is as follows: Sell memberships to a shared kitchen while restauranteurs distribute their products through vendors like Door Dash.
Up-and-coming restaurants can then no longer have the massive overhead of a brick-and-mortar lease and can distribute their product to new urban audiences. Now, one space has the flexibility to accommodate multiple kitchens and restaurants, bringing new businesses into markets and offering greater variety to customers along with a better experience for eating in.
Embracing Out-Of-Box Thinking
Now, take that same concept and apply it to retail, industrial, etc. and you can see the opportunities that lie ahead. We need to embrace out-of-the-box thinking when it comes to constructing, designing, furnishing and operating these spaces.
Additionally, zoning officials and regulators need to reimagine how we transition these properties to function in a new way. If we shift away from the notion that commercial real estate is fixed and homogenous and embrace the potential of flexibility and diversity, our downtown cores can transform from a weight around the neck of cities to a landscape full of new opportunities. In this way, downtowns can offer real estate investors and city residents a new frontier.
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