Are Glory Days Over for the American Office Tower?

Construction cranes in Beirut, Lebanon. Image credit: the On the Road Again blog.

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.

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4 responses to “Are Glory Days Over for the American Office Tower?

  1. this is emerging proof that the middle class is going away and replaced by service sector jobs.

    Basically, many in the middle class worked as middleman information gatherers and distributors.

    Oracle and Cloud Computing has replaced them.

    I’m not surprised the govt fumbled the ball in info technology but it will get fixed – and think about this.

    once you can get insurance by doing an Amazon-type experience – why would you need to talk to an insurance guy any more?

    multiply this throughout all the industries where information is central and what you have is less and less need for that guy that generates the Friday sales spreadsheet info.

    or the lady that takes phone orders and makes sure the invoices are mailed.

    the next areas to be “hit” are going to be higher Ed and K-12.

    we’re going to see less and less professors and non-core-academic school teachers…

    but what is going to happen to them?

    that’s the question.

  2. We have written here about this trend repeatedly, from many angles. A good recent place is start is found at: https://www.baconsrebellion.com/2013/05/why-commercial-developers-should-be-afraid-very-afraid.html#comments

    And now here Jim’s article presents more proof that makes the future harder to ignore. The only thing that never changes is change. The past is gone, learn from it. Don’t flail and fail trying to recreate and relive it.

    In an effort to cast this past change into a very broad and summary thumbnail perspective, recall the mega trends that radically altered our landscape and how we have lived over the past 70 years post WW11.

    After WW11, the auto centric “suburban residential subdivision” blossomed out across rural lands that surrounded our cities and towns (including the close-in suburbia that had arisen before the war). This intensified in the fifties and it continued unabated until very recently. It slowed its pace after the dot com bust of 2001 then surged briefly, to fall sharper yet during the recent recession, from which it has yet to recover.

    Large commercial uses followed the residential uses out into the suburbs, gaining strength in late 60s, 70s, and 80s, growing from strip centers to shopping centers to malls to regional malls in the space to two decades. This loss of residential and commercial uses to the outer suburbs sucked the vitality out of many of our older inter cities and towns. It began after WW11 and it continued until quite recently.

    In the 1970s there began the rise of the suburban office parks. This gained intensity throughout the 1880 and it culminated in the satellite cities that were by and large suburban office hybrid cities to go along with separated but vast residential subdivisions punctuated by strip centers and mall commercial. These outer suburban uses also worked to further debilitate many of the older urban down-towns. By now they were losing office workers after they had lost residents then shoppers to the exploding suburbs that were on an upward trend of hyper growth.

    This hyper suburban growth of separated uses peaked in 1990. That hyper growth has never returned despite the passage of 23 years.

    The severe economic (real estate) recession that began in 1990 knocked the wind totally out of this hyper suburban growth’s outward explosion. The ensuing Dot Com boom beginning in mid 90′ put some wind back into the sails of the satellite city and office park building but far less than had been driving suburban markets before.

    The Dot Com bust and 9/11 led to another collapse of outward suburban growth in 2001. A brief mid decade revival was snuffed out in 2008.

    These doldrums going on now for most of the last 23 years continue today, and show little sign of revival five years later, after their brief flicker of life. So the return to the go go days of old are long overdue.

    Meanwhile, since the year 20oo up to today, northern Virginia has wasted billions of dollars preparing for a party that has never arrived.
    Everybody there has been shoveling out public moneys to get poised and ready for the Do-Da we remember so well, and long for today.

    Thus we have already wasted billions since 2000 on Dulles Airport, and most likely are now wasting (or vastly overspending) more billions on the Dulles Silver Line, rather than spending those funds on realigning and refurbishing what we have already built, getting it ready for the real future that will arrive. So, lets stop wasting money on a future that is a mirage, no more than a mirror image of the past long gone forever.

    Like Thomas Wolfe said, “you can never go home again.” The good news is that our future, although different, is a very bright one. But we must get ready to grab hold of it, instead to clinging to a dead past. Jim’s above article above (and past commentary on this website) offers exciting hints about that future if we take the time to see it.

    By the 1960, commeremptied out citys

  3. Imagine how these emerging trends will manifest themselves in Northern Virginia’s future. The possibilities are many and varied. Consider for example their very positive impact on traffic.

    Suburban office and mall retail are huge generators of traffic. Extreme examples include the Pentagon, Potomac Mills, and Tyson Corner’s concentrated office density. These office and retail uses, standing alone without nearby integrated residential, put traffic on steroids. These three examples alone generate hundreds of thousands of auto trips daily. They cause much of northern Virginia’s traffic dysfunction.

    Thus the decline in growth of concentrated suburban office and retail use, and their contraction in many locales within northern Virginia, will open up a huge opportunities to re-balance those uses and integrate them with residential in those suburbs that we have built over the past 40 years. And do it in ways the literately suck existing traffic off our roads. So these trends will substantially reduce the travel times of daily commuters and interstate travelers alike, if we deploy land use and road improvement strategies to take full advantage of them. The better our active strategies and tactics the more success we will have. Done right, we can magnify the benefits of these trends exponentially.

    For some insight into the astounding decline of suburban retail see: https://www.baconsrebellion.com/2012/11/black-friday-internet-retailing-and-the-shiftin-tax-base.html#comments

    Some way that we can liquidate suburban traffic are found at:
    https://www.baconsrebellion.com/2013/03/sequestration-and-resilience-in-washington-region.html

    Some comments taken from sequestration article are copied in below.

    “First, very early on, Arlington County came to understand, and found solutions to deal with, the fact that commercial development generates far more traffic than residential housing. In contrast, the development of Tyson’s Corner acerbated this basic problem. It built a suburban city.

    Think about it. One person typically occupies far more space at home than in his office. Plus a doctor sees far more daily visitors in his office than at home. So does a store clerk. So does the typical office worker. So does someone working in a convenience store, at a hairdresser’s, or flower shop.

    Suburban uses, dependent on the automobile, turbo charge these realities, traffic wise. Here, shopping centers, regional malls, and big box retail are the worst offenders. Their sales depend on auto visitors. So does their value, should the owner sell his asset because its traffic volume proves the drawing power of its stores. So suburban retail centers are designed to draw auto traffic, the more cars from the more far away locales the better. Potomac Mills is an example. Tysons Corner Mall is another mega example. (Ballston Common Mall is not as explained below)

    As a result, within suburban malls, shopping centers and big box outlets, a single parking space can “turn over” 65 times in a single day. One space makes possible 65 visits (each one by a different car that comes and goes) during business hours. In contrast, a parking space within a typical urban residential high-rise might generate only one turnover a day. Office buildings also substantially outpace residential. Distance between uses in suburbia drive this traffic.

    Herein lies some of the secrets Arlington County discovered early.

    1/ Density of development does not create traffic.
    2/ An imbalance of separated uses creates traffic, irrespective of density.
    3/ High density development of synergistic uses properly properly placed relative to one another, within an urban center, will drive traffic down. And it will keep reducing traffic until, and so long as the optimum mix of uses is achieved and maintained, and varieties of mass transit is steps away.
    4/ Mixed uses are best developed in tandem. Then your “city will find itself.” Then its best mix of uses, their variety, proportions, and nuance emerge in time to be captured. Thus, tandem development fuels best opportunity for market and financial success for all involved – whether office, retail, or residential tenant, owner, worker, or store clerk.

    Complexities are involved in building a successful urban center. But at base and speaking generally, Arlington learned that office space should never exceed nearby walk-able residential. That retail commercial should be built at same time as office and residential. That commercial space – office, retail, hotel – should best not exceed total nearby residential space.

    That the proper mix and match of uses can be used to drive traffic down as far as possible, by creating synergies that take visitors out of their cars, put them into mass transport, and/or on the streets walking instead. This in turn creates vibrant many faceted neighborhoods. This attracts ever more tenants, residents and shoppers. This throws off ever more revenues to pay for expanding public amenities and necessities. This becomes a spiral that feeds on itself, throwing off ever more benefits for all involved.”

    Hence we need to look at these emerging trends not a problems but as great opportunities. But to take advantage of those opportunities, we must alter how and where we build roads and mass transit, and how and where we development real estate. Most importantly we must blend land use and transportation decisions into a seamless whole, and aim those decisions to fixing what we have already built instead of repeating old mistakes by building what we no longer need, given the new and altogether different future we face. For more discussion on this latter topic please see the following listed below.

    https://www.baconsrebellion.com/2013/09/setting-priorities-at-dot.html#comments

    see for example: https://www.baconsrebellion.com/2013/09/how-about-a-road-realignment-and-closure-commission.html#comments

    • A few years back – there were various circulating ideas that some work could be done at home especially if a high speed internet connection was available.

      but the more I discussed the idea with supervisors the more I realized that many of them believed if they could see you at work – they could be assured you were working ..producing… whereas if they could not see you.. they were not so sure.

      they had metrics for work.. deadlines for things due… weekly progress reports, etc.. but their faith in these metrics was weak and they felt much more comfortable if they saw you at your desk.

      the other thing I’d mention is that contract employees were also used – and they were cheaper than company employees because there was less “overhead” – in theory they did not need to work in the main building so no desks or toilets, etc were needed for them… but guess what… the bosses wanted them on-site so they could see them working on their projects.

      I think we’ve gotten past this for some kinds of work. “Go to Meeting” allows bosses to “see” people working…

      and the bosses real job is not just being reassured that people are physically on site – but … what the hey… producing!

      I’d be curious to hear DJ’s view on this since he is a businessman dealing with modern technology products which really can be developed in a variety of places instead of an office building…

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