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The fate of the business district

Offices are still pretty empty. So, what does the future hold for business districts?

Many years ago, I once made the mistake of booking a hotel in the business district of a large city during a personal vacation. I had planned on getting to know that city, but I somehow ended up in its business district. Instead of a vibrant, bustling metropolis I expected to encounter, I ended up in an ocean of empty concrete and tall, vacant buildings. I had arrived on a Friday afternoon, so of course the business district was completely dead. There was not much to do during the day, since all of the local businesses like cafes and restaurants were geared towards businesspeople, towards the typical Monday through Friday, nine to five grind. Over the weekend, I had to travel far away to find any sort of entertainment. When I left on Monday morning, I noticed how the ghost town I was previously staying in had transformed into the hotbed of activity I had expected; my timing was simply terrible, and it was a mistake I never madea gain. According to Ernst & Young and the Urban Land Institute, about a fifth of the HQs of Fortune Global 500 companies have their HQs in these business districts. From London, to NYC, to Hong Kong, 4.5 million workers worldwide work in these areas, or at least they used to before the pandemic.

It could be worse

The pandemic has led to empty offices worldwide. Things could be worse for the property owners of said buildings, since tenants of these buildings have, by and large, continued paying their rents. So, despite how the pandemic is dragging into its third year, business property owners have not taken as big of a hit as owners in the hospitality or retail sectors. Before the pandemic, unoccupied office buildings represented 8% of total office space, and that number now sits at 12%. While that is a 50% increase, we have grown accustomed to much larger, disastrous swings due to COVID. But these global numbers are not quite accurate when it comes to the most important business districts, which are taking the biggest hits. New York has a 16% vacancy rate. London’s is 18%. San Francisco’s is 20%. And in Hong Kong, net rent has dropped by more than 7% in 2021 after a drop of 17% in 2020.

Despite the setbacks, those who develop business properties have remained optimistic, at least publicly. They tend to place their bets based on long-term rewards, so their optimism is based on the idea that people will return to offices eventually. That said, other experts opine that this optimism is delusional because the relationships between workers and offices have changed forever. Because of that seismic shift, property developers worldwide have started investing more in apartments, so much so that investments into apartments now outpaces that of offices for the first time. Price drops have followed suit: prices in San Francisco’s Financial District are down by 20%, and prices in Manhattan are down by 8%, both despite much higher prices across these cities when it comes to apartments.

All of these paradigm shifts are bringing in changes that are unwelcome to some, yet welcome to others. If business districts become less viable from an economic perspective, then developers and city planners will be forced to consider alternatives, primarily more diverse groups of buildings together. This shift alone will make large swathes of big cities far more liveable, or at least enjoyable. Weekend ghost towns may disappear in the coming decades.