From left to right: Diane Hoskins, co-chair of Gensler and global chair of ULI; Vincent Reina, senior advisor for Housing and Urban Policy, Domestic Policy Council, The White House; Laura Hines-Pierce, co-CEO of Hines; and Clarence Anthony, CEO and executive director, National League of Cities, speaking at the 2023 ULI Fall Meeting in Los Angeles.
Economic and workplace upheaval from the COVID-19 pandemic took a heavy toll on urban centers, causing lasting changes that present a major challenge to the commercial real estate industry. But the crisis also created an opportunity for aging single-use business districts to reinvent themselves as mixed-use neighborhoods, according to panelists at ULI’s Fall Meeting in Los Angeles. The panel was moderated by Diane Hoskins, ULI global chair and co-CEO of global design firm Gensler.
In some ways, the pandemic accentuated urban centers’ existing weaknesses and accelerated changes that already were underway. “Cities were oversupplied with office [space] before the pandemic,” said Laura Hines-Pierce, co-CEO of global real estate firm Hines, whose portfolio includes almost $95 billion in assets under management across 30 countries. “And the shock of the last few years, between the pandemic and interest rates rising, in my mind, is creating a moment where that oversupply has not been allowed to crack naturally.”
As a result, cities face market shock, in which 10 percent to 30 percent of properties may undergo, in a short period, “true obsolescence,” Hines-Pierce said.
That problem was exacerbated by the shift to remote work, which U.S. Census data shows began before the pandemic and was accelerated by pandemic shutdowns. Even as companies reopen offices and bring back workers, many businesses are embracing the concept of hybrid offices, with employees working onsite only part of the time. “Hybrid is here to stay,” Hines-Pierce said, adding that the impacts of that shift for urban centers are profound. “It extends beyond the office worker, and [affects] where people want to be for retail, and where people want to live,” she said. “That, in turn, [affects] where people want to work, and the value of office buildings in various submarkets.”
One major result has been a migration of occupiers away from single-use downtowns to mixed-use neighborhoods with newer, high-performance buildings and more transportation connectivity. Hines-Pierce noted that downtown Los Angeles has a significantly higher vacancy rate and lower rents compared to Century City, just 12 miles away.
Clarence Anthony, CEO and executive director of the National League of Cities, said that leaders in urban areas are already “working on figuring out how … we reimagine those buildings. How do we reimagine our small business engagement?” Those leaders are also looking at how to plan communities differently, whether by making better use of open space or revamping zoning laws and permitting processes to speed innovation. “It shouldn’t take a year or nine months to go through an approval process.”
The Biden Administration is also taking a more active supporting role in the reinvention of urban centers, according to Vincent Reina, the senior advisor for housing and urban policy at the White House Domestic Policy Council.
Last week, for example, as part of a larger plan to increase the housing supply, the administration announced that it would allocate $35 billion from various existing programs to support office-to-residential conversions and transit-oriented development, including low-interest loans, loan guarantees, grants, and tax incentives.
In addition, “we’ve done a lot of work to reduce barriers to building housing, like restrictive zoning and land use practices,” said Reina, who is working for the White House while on leave from the University of Pennsylvania, where he is an associate professor of urban economics and planning.
Hines-Pierce noted that only a small portion of existing office buildings are suitable for conversion. A recent working paper published by the National Bureau of Economic Research estimated that only 11 percent of commercial office buildings meet that criterion, though global design firm Gensler’s study of 1,000 potential projects puts the number at 25 percent. Such low numbers align with the plenitude of obsolete assets, built from the 1970s to the 1990s, that have large floor plates, which don’t provide sufficient access to natural light that residential units require. Furthermore, repurposing office buildings remains a challenge because “once you get into an existing asset, you don’t always know what you’re going to find, versus when you’re building ground up,” Hines-Pierce said.
Even so, finding ways to reuse existing buildings provides a major benefit in terms of fighting climate change, according to Hines-Pierce. Doing conversions rather than teardowns and new construction can reduce the amount of embodied carbon, which includes emissions generated during the manufacturing and transportation of building materials and the raising of a structure. Whereas much of the effort to reduce buildings’ carbon footprint has focused upon emissions generated from operations, embodied carbon increasingly is recognized as an important opportunity, as well.
Anthony said that the American Rescue Plan, the $1.9 trillion stimulus package proposed by President Biden and passed by Congress in early 2021, helped downtowns by enabling city leaders to give small businesses and companies money to help them survive the pandemic. Additionally, the bipartisan infrastructure bill, passed later that year, created jobs and provided an opportunity to rebuild such assets as water systems, he noted.
“It actually started us to be able to rethink work, what work looks like, and what types of jobs and what types of skills … we need,” Anthony said.
