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It took a global pandemic to convince American businesses that their employees could work productively from home, or a favorite coffee shop. Post-COVID-19, employers are struggling to find the right balance of in-office and remote work. However, hybrid work is likely here to stay, at least for a segment of workers.
This shift isn’t just changing lifestyles – it’s also affecting commercial spaces. Office vacancy rates post-COVID-19 shot up almost overnight, and they remain near 20% nationwide, the highest rate since 1979 as tenants downsize in place or relocate. This workspace surplus is putting pressure on existing development loans and leading to defaults or creative refinancing in a market already plagued by higher interest rates.
Office tenants with deeper pockets have gravitated to newer and larger buildings with more amenities, often referred to as Class A or “trophy” buildings. Older Class B and C buildings, which often have fewer amenities or less-desirable locations, have struggled to fill space.
High vacancy rates are forcing developers to get creative. With reduced demand for older buildings, along with housing shortages in many American cities, some downtown buildings are being converted to residential use.
These projects often include some percentage of affordable housing, underwritten by tax incentives. In October 2023, the Biden administration released a list of federal loan, grant, tax credit, and technical assistance programs that can support commercial-to-residential conversions.
As an architect, I’m encouraged to see these renovations of older commercial buildings, which are more economical and sustainable than new construction. In my view, they are fundamentally changing the character of our cities for the better. Even though only about 20% to 30% of older buildings can be profitably converted, architects and developers are quickly learning how to grade these structures to identify good candidates.
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Rooftop construction at a high-rise building undergoing conversion to apartments in Manhattan’s financial district in New York City, April 11, 2023. AP Photo/Bebeto Matthews
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