Although downtown business districts are struggling due to continued economic lockdowns and questions about safely reopening offices, the long-term outlook for these areas appears to be in good shape.
Business districts are likely to look different, though, as employers adjust to technological advances and a desire from employees to shift away from the traditional model to one that allows more flexibility for telework and work from home. A report from CBRE, a real estate firm that conducts significant research in its sector, indicates that people will want more flexibility with remote work but that at some point, employees will return to a traditional office environment.
“The pandemic has created unprecedented opportunities and challenges for commercial real estate occupiers that likely will usher in a new era of innovation and creative problem-solving,” the report stated.
What that translates to in real-life remains to be seen. For now, downtowns and business districts are still dealing with the economic lockdown and, in some places, protests that have turned violent.
The Chicago Loop Alliance said the district it represents saw an 80 percent drop in pedestrian activity, but numbers are ticking up as offices, retail businesses, and restaurants reopen. The volume of people parking downtown is also increasing.
“What this shows us is that people crave in-person interaction, collaboration, and connection,” said Jessica Cabe, a spokesperson for the Chicago Loop Alliance. “With all that said, over the past five years the Loop has already begun a transformation from strictly a 9-5 business district to a mixed-use neighborhood, with a 30-percent increase in the number of residents, investment in public spaces like the Chicago Riverwalk, world-class arts and culture that attracts Chicagoans and visitors alike, and more.”
Downtowns throughout the country have experienced highs and lows with some bleak times during the 1970s and 1980s. Since then, though, there has been a resurgence of people moving into urban areas for convenience for work and amenities that can’t be easily located in suburban or rural areas. A Brookings report notes that nearly 40 percent of downtowns in Southern states lost populations between 1980 and 2000. Cities like Nashville and Austin are now seen as trendy and growing hubs for technology companies.
Pittsburgh is often noted for its success redefining itself after the steel mills closed. Between 1970 and 1990, the city lost 100,000 jobs and about one-third of its total population. Unemployment soared to 18 percent. By 2005, it had turned itself around so well that Uber and other technology companies were calling it home due to a city focus on attracting engineering expertise.
Now, there has been a 10.7 percent increase in the amount of office space available for sublease over the fourth quarter of 2019, according to a flash market from CBRE real estate company. There has been 435,000 square feet of office space offered for sublease since April with more than 1.45 million square feet available throughout the downtown area. A spokesman for Pittsburgh Mayor Bill Peduto said they’re regularly talking with city business owners.
According to Mortgage Bankers Association, commercial and multifamily mortgage bakers could lose $248 billion of loans backed by income-producing properties this year. That’s a 59 percent decline from 2019’s record volume of $601 billion.
“The ongoing COVID-19 pandemic continues to disrupt commercial and multifamily real estate markets. Forecasting amidst the social and economic responses to the virus is difficult, but we do expect originations to drop significantly this year before making a sharp, partial rebound in 2021,” said Jamie Woodwell, MBA’s Vice President for Commercial Real Estate Research. “Net operating incomes (NOI), property values and cap rates across the different property types are expected to experience varying levels of stress in the months ahead, with hotel and retail properties already being the hardest hit.”
Ultimately, the future of downtowns will depend on how well companies manage a balance between allowing telework and flexible schedules with redesigning spaces to accommodate social distancing.
“In order for business districts to thrive, they need to be great at more than one thing; that was true before COVID-19, but the pandemic is certainly adding a sense of urgency to the idea,” Cabe said.