Downtown revitalization strategies will need to go beyond office conversions, experts say
July 17,2023
See full Dallas Business Journal article by Ashley Fahey here.
For city leaders and real estate developers looking to rethink downtown real estate in the aftermath of the Covid-19 pandemic, initiatives and strategies will have to go beyond office-to-residential conversions.
Converting unused or dated office space into new uses — in particular, much-needed housing — will be important, but those who work in real estate and who are serving as consultants to government officials and downtown business-improvement districts say conversions won't be a silver bullet to revitalizing downtowns. After all, those projects are expensive and risky to take on and often have specific infrastructure requirements to even be feasible.
"Cities recognize it’s not a panacea," said Kate Collignon, a partner at HR&A Advisors, a consultancy on real estate and economic-development projects. "It’s an important part of the conversation but it can’t be the sole solution."
More than three years after the onset of the Covid-19 pandemic, many U.S. downtowns have yet to fully recover, in large part because of sluggish return-to-office activity but also due to concerns about public safety. Data from Placer.ai's nationwide office building index, which looks at foot-traffic data from 800 office properties across the country, reported the first half of 2023 saw foot traffic to offices down 39.7% compared to the same period four years ago.
Those like Collignon who are actively studying downtowns in the wake of the pandemic — and working with different groups in the public and private sectors — say making downtown a desirable place to live, visit or stay remains key.
A combination of factors — increased office vacancy, decreased pedestrian activity, and less activity to retail and food-and-beverage venues — has made downtowns less exciting at a moment when those city spaces need to attract residents, visitors and workers, Collignon said.
And while city officials in downtowns across the country are looking at incentives programs, zoning regulations and other tools to make it easier to convert office buildings into new uses, the success of those conversions is dependent upon a successful residential market, she added.
"You have to make downtown a place where residents want to be," Collignon said. "One of the key challenges cities are finding, particularly for cities that had an office monoculture downtown, is that neighborhood residents don’t view downtown as theirs. They don’t go downtown unless they’re going to work."
Starting over
To successfully revitalize a downtown, industry principals say there should be more cohesion among real estate owners and others spearheading downtown revitalization efforts.
In a typical downtown, buildings have many different owners, all of whom have competing visions and goals to at least some extent for their properties, said Louis Archambault, partner and vice chair of the real estate practice at Saul Ewing Arnstein & Lehr LLP.
In the wake of the pandemic, cities are preparing to face some amount of a shortfall in tax collections from commercial properties — namely, office towers with rising vacancy — as valuations decline amid a weaker leasing market.
As trillions of debt backing commercial properties is set to expire in the coming years — and in a much higher interest-rate environment than when those properties were initially financed — the risk of bankruptcies and foreclosures of office towers is arguably higher than it's been in decades.
In some ways, that distressed situation could create an opportunity for one person or one developer to buy up properties — likely at a discount — and create a unified district, Archambault said.
"It's almost a necessary component of revitalization to have a down period, where you’re able to take older properties and either renovate them, get a different viewpoint for how they’re going to be or have one owner redevelop them into a new concept," he said. "But you don’t get the rebirth until you get the decay."
Archembault cited as an example Miami's Wynwood and Design District neighborhoods, where a collection of once-blighted industrial buildings have been revamped by a handful of real estate owners that, in unison, created a development district consistent with a singular vision. The Wynwood neighborhood has since become one of the city's hottest areas for development, as the original vision evolved into a more dense environment and bigger real estate projects.
Taking a hard look at policies around adaptive reuse should be part of what city officials look at as strategies for revitalizing downtowns, said Mateo Romero, a partner at Miami-based real estate firm Gridline Properties.
"There’s a need to redesign the built environment," Romero said. "Buildings are built to last many years, and it’s costly and time-consuming to redevelop them. We need to adapt the structure to the new and evolving needs of a community. Things are changing very fast."
With a neighborhood like Wynwood, where Gridline has done several projects, its evolution wouldn't have been possible had local regulations not allowed for the type of adaptive reuse that initially set the tone for the neighborhood, Romero said.
Developing a strategic vision or comprehensive plan isn't a new concept for downtowns, but real estate experts say it may be worth revisiting those plans and goals in the wake of the pandemic to figure out where change needs to occur.
Short-term gains versus long-term investment
America's downtowns have largely been defined by big-name companies that've set up shop in glassy towers over decades or even centuries.
But with more people working remotely, or in a hybrid format, downtowns will have to evolve beyond a corporate-focused environment to attract a diverse set of businesses — including retailers — and people.
A lot of the goals and initiatives cities are examining, including residential conversions and infrastructure projects, are lofty, long-term and require extensive planning or funds. But there are short-term things cities can do to bring people downtown beyond an office capacity, said Billy Grayson, executive vice president of centers and initiatives at the Urban Land Institute.
One strategy Grayson said has proved effective is actively programming public space and figuring out ways to create temporary activation, such as streetearies or concerts and movies in a downtown park. He cited as an example the Cincinnati Center City Development Corp., an organization that bills itself as a nonprofit real estate development and finance organization focused on revitalizing Cincinnati's urban core with the city and corporate community.
The group is taking a multi-pronged approach to bring people downtown, including revitalizing condemned or abandoned buildings, helping to facilitate new construction on parking lots and other vacant spaces, and seven-days-a-week programming.
"Usually, we see different organizations tackling different components. ... They’re (either) really focused on development, or land banks are really focused on repurposing blighted properties, then you’ll see (business-improvement districts) focused on sweeping streets or activating downtown," Grayson said. "It’s really interesting to see an organization bridging those connections."
For big-cost strategies like conversions and adding infrastructure to better connect downtowns with other neighborhoods, it may require forgoing short-term revenue to incentivize long-term economic prosperity and activation, Grayson said. But, he added, there are federal incentive programs to help cities weather some of the cost of the investment in infrastructure — and possibly even conversions.
Retail recovery strategies are also being looked at, as downtown businesses that struggled through the pandemic continue to feel the ramifications of fewer office workers in downtowns, depending on the day of the week.
For cities, it's not only about leasing those spaces, but also thinking critically about what's happening on the ground floor of downtown buildings and aiming to diversify those uses.
"It’s not strictly about hard or soft goods. It's about cultural uses that reflect a city’s values and entrepreneurship, and the different kinds of food and beverage being offered," Collignon said.
In more concrete terms, that could mean cities should look at regulatory controls or how to provide expanded access to retail and business owners — potentially by downtown or public entities taking on master leases for ground-floor spaces to curate those spaces, or guaranteeing leases for start-ups.
But while regulatory changes, incentives for difficult projects like office-to-residential conversions and creative programming are all in the mix, what may distinguish the success of downtowns in years to come is leadership, Collignon said. That encompasses leadership of public officials as well as within the real estate industry and major companies that continue to occupy space downtown.
As evidenced in past economic downturns, when those groups are in lockstep, that tends to produce greater clarity more quickly around the types of policies that'll have an impact faster, Collignon said.
For most U.S. downtowns, working to address the issues at hand sooner rather than later — and facing tough realities about the office market head on — will be important.
"Speed of action is critical here," Collignon said. "The faster you can stem the decline in the commercial market, the less likely you end up entering a situation where you're looking at a generational change to bring it back."