Construction cranes in Beirut, Lebanon. Image credit: the On the Road Again blog.
by James A. Bacon
The United States is four to five years into the business cycle but you’d barely know it from the dearth of new commercial office buildings. Construction cranes may dot the city horizons of China, India and even Lebanon but here in the States, outside of a few marquee markets with strong technology or energy sectors, they have been as scarce as Obamacare sign-ups.
Nationally, office rents remain stuck below 2007 levels. The commercial real estate sector expects to add only 30 million square feet this year compared to 150 million square feet per year in 2006 and even more earlier that decade.
One problem is that the economy still hasn’t recovered all the jobs lost during the 2007-2008 recession. Another is the continued increase in working at home, which now amounts to 4.5% of the workforce in major metropolitan areas. Perhaps most worrisome is the corporate emphasis on more efficient utilization of office space, which for many employers runs around 50% at any given time. The old rule of thumb was 250 square feet of office space per employee. By the end of the decade, that could drop to 100 to 125 square feet. Joel Kotkin sums up the trends on the New Geography blog.
Events are unfolding as I have long foreseen. I don’t claim any special powers of prescience. I just happened to have produced an e-newsletter several years ago for Richmond-based Agilquest, a company that produces office hoteling software. Agilquest’s CEO John Vivadelli was an evangelist for downsizing offices to reflect the diminished space needs of the mobile workforce. Thanks to advances in building automation, it’s easier than ever to track office under-utilization, and facilities managers are discovering how much space they are wasting. The decline in office construction reflects far more than a slow economy — it’s indicative of a long-term trend.
This dramatic shift should be of interest to more than facilities managers and commercial real estate brokers. Local governments rely upon commercial real estate to prop up their tax bases. Office properties pay far more in taxes than they require in local services. They represent a huge net gain to the locality. Booming construction means booming tax revenue. Stagnant construction means stagnant commercial tax revenue. The economic development departments of many jurisdictions are organized around recruiting commercial investment which is unlikely to replicate past performance.
For the city of Richmond, the $110 million Gateway Plaza may be the only new addition to the city skyline this entire business cycle. Meanwhile, older downtown office buildings are being renovated — as apartments. That’s awesome for revitalizing downtown but the net tax gain (revenues – cost of services) is much diminished. Bottom line: Localities may have to adopt new strategies for bolstering their tax bases.
The situation could be even worse for regions that have put themselves deeply in hock to build new transportation infrastructure. In particular, I am thinking of the Silver Line in Fairfax and Loudoun Counties. Construction of the $7 billion rail-to-Dulles project was justified on the grounds that (1) the national economy would continue growing like it did in the 2000s, (2) the Washington regional economy would continue growing like it did in the 2000s, and (3) corporate employers would require as much office space as in the past. Events have called all three of those assumptions into question. (The dearth of opportunities may help explain why Northern Virginia developers are so frantic to jump-start the Dulles air-cargo business by building the North-South corridor.) Insofar as Fairfax County officials are counting on the wholesale re-development of land around Silver Line metro stops, they may be gravely disappointed.
This trend also threatens an idea that I have long nurtured: that new commercial development would drive, and pay for, the re-development of scattered, low-density, auto-centric land use patterns into walkable urbanism. If corporate employers are shrinking square footage per employee, they won’t need new office space — they’ll just grow in place. Meanwhile, the retail sector continues to downsize as consumer incomes lag and the retailing shifts to online shopping and delivery. Given these two mega-trends, the financial impetus for re-developing our communities may peter out.
We need to start sorting through the implications of these trends rather than assume everything will continue as it always has.
