Washington, DC, October 17, 2023 --  

The century-long dominance of the downtown office building has come to an end. Residential development is the wave of the future.

When the Old Admiralty building first opened in central London in 1726, it marked a revolutionary change in office work. The leadership and bureaucracy of the British Navy, then vying to be the most powerful force in the world, could now work in a centralized office building in downtown London. The close proximity of workers allowed sharing of information in paper files and ledgers. The building hosted a library of charts and maps, and provided space for regular face-to-face meetings without the need to take a carriage across town.

Three years later, the British East India Company opened new New East India House, also in central London. At the time a private corporation granted a monopoly on trade with India, and its growing bureaucracy of office workers needed space to manage trade with what would become the British Empire. As the exchange of information became ever more important to managing a globalized industrial economy, the era of the downtown office had been born.

Three centuries later, that era is now coming to an end. Six miles east in Canary Wharf, London's skyscraper district, office occupancy rates have plummeted. London's tallest building at One Canada Square is now 36 percent vacant compared to just four percent before the pandemic sparked the work from home revolution¹.

London's troubles are nothing compared with cities in America like San Francisco and Washington, DC. American office blocks completely dominate the central business districts on a scale that never took hold in London and other European cities. San Francisco's office vacancy rate reached 33 percent last month². Such statistics understate the problem, because they don't account for spaced that is owned, or leased but still empty because office workers are at home some or all days of the week.

Statistics do a particularly good job of hiding the problem in Washington, DC, which reported a relatively modest 20 percent office vacancy rate in July³ -- despite some streets looking like virtual ghost towns, with shuttered businesses that once supported lunchtime and happy hour crowds.

As a government town dominated by the feds, leasing numbers don't report the full story of the Federal Government, which typically owns agency headquarters while leasing extra space for back office functions. A report from America's General Accountability Office watchdog says that 17 out of 24 federal agencies are only using 25 percent of the space in their headquarters.⁴ DC's mayor Muriel Bowser has lobbied for the federal government to require workers to return to the office or allow their buildings to be repurposed.⁵

Residential Paradise Lost (slide to compare) Washington's Farragut Square Neighborhood and K Street Lobbyist District, 1909 and 2023 Sources: Baist's Real Estate Atlas Surveys of Washington, OpenStreetMaps.org

Despite all the noise created by a handful of authoritarian CEOs demanding their underlings return to serve them in the corporate office, things are not going back to the way they were in 2019. Companies might end up recreating a few simulations of the 2019 office environment for the temporary amusement of their domineering overlords. But market forces are unrelenting things. Work from home policies have huge advantages in terms of both cutting costs and recruiting and retaining talent. Whenever an overbearing CEO bangs his fist on the desk about a return to office, his competitors surely smile.

This change means the century-long dominance of office buildings in city centers is at an end. Decades in the future, central Washington DC and San Francisco are bound to revert to a land use model closer to that of the late 19th century before the office districts took over. Back then, today's downtowns host a much higher percentage of residential buildings, as well as businesses supporting residents (grocers, restaurants pubs, hardware stores, etc.). Vibrant neighborhoods surrounding downtowns still follow this model in both cities -- think North Beach and Nob Hill in San Francisco and DuPont Circle and Capitol Hill in Washington DC. In the 20th century, growing office districts relentlessly leveled 19th century row houses on their margins to be replaced by office blocks. That tide has now turned.

The main impediment to this change is not corporate CEOs, but the landlords and the banks. Landlords who own office buildings are facing economic ruin as prices sag and vacancy rates rise. The return of some companies to in-office work provide false hope, but little relief, as those cases typically apply to existing leased space that is simply underused. As more office leases come up for renewal, vacancy rates are bound to rise further making it ever harder for building owners to pay their bank loans. Banks have little desire to write off their loans and take possession of distressed office buildings, so they offer breaks on loan repayments to landlords to avoid the inevitable day of reckoning.

The landlords and the banks are essentially praying for a million-to-one shot that things will go back to the way they were, or somebody will bail them out before their house of cards collapses. Meanwhile, their empty buildings rot with fentanyl addicts camping out in vestibules, problems on the ground get worse, and opportunities for near-term improvements get harder with each passing day. This is the so-called "Doom Loop" that comes from allowing the status quo.

Avoiding this means bringing the inevitable day of reckoning forward so sensible redevelopment can proceed. Yes, converting office buildings to residential is expensive at best and impossible at worst. But even if an office block must be taken as a loss and demolished to be redeveloped as residential, it is better than it sitting as vermin-attracting blighted property for years, its cancerous effects eroding the value of neighboring buildings. Municipalities must raise property taxes on vacant buildings and offer incentives for redevelopment in order to expedite this change.

It took nearly three hundred years from the creation of the first office buildings before they came to dominate America's city centers. Reversing the trend won't take that long, but it clearly isn't something that can happen overnight. Given that this change is inevitable, city leaders would be wise to embrace it and proactively help build their downtowns' residential future.

Related Web columns:

Existential Threat, July 26, 2022

The Great Divergence, May 4, 2021

Notes:

1. Daily Mail, Emptying Canary Wharf, October 9, 2023

2. San Francisco Chronicle, S.F. Office Vacancy Hits Staggering Record, With 30 Million Square Feet Empty, September 25, 2023

3. Commercial Observer, DC Records Historic Office Vacancy Rate Despite Leasing Uptick in Q2, July 10, 2023

4. Planetizen, Office Vacancies at Federal Agencies as High as 75 Percent, October 11, 2023

5. Axios, Mayor Bowser Taps New Economic Development Chief, October 13, 2023