City Zoning Departments Hold The Key To Office Property Value Improvement
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
Office properties are undergoing one of the largest existential crises since office properties became a perceived necessity for businesses. The remote work revolution coupled with demographic upheaval due to the baby boom generation entering mass retirement and other factors has enabled many workers to enjoy working remotely, and demand for office properties reflects it.
But it is local zoning departments along with state and even federal actions in certain circumstances that hold the key to repurposing or replacing these properties in an expeditious way that flattens the speed bump, as it were.
Zoning: A Brief History
First, a story paraphrased from the late Jim Rohn. A man is tending his ornate garden when a stranger happens along. The stranger says hello and compliments the man’s garden, saying what a masterpiece of God’s work it represented. The man thought for a minute, then replied ‘yes, you’re right. The good Lord has indeed blessed this garden with sunshine, rain, soil, and seed. But you should have seen it when he had it all to himself.’
Modern zoning laws separating industrial, commercial, and residential uses came into being in the 1920s and 1930s with the stated intent of curbing nuisances and pollution, but were also aimed at encouraging the building and purchasing of single family homes, which modern planners viewed as the ideal incubators for the American nuclear family. They were later used for the much more nefarious purposes of segrating society along racial and class lines.
The garden analogy is somewhat apropos, in this case. A city mimics a living organism in its development, growth and operation. They consume resources, metabolize them into other forms of value, and excrete waste. But you should have seen when they were left to their own growth devices. Planning has definitely been an asset, albeit one of highly variable value. A city requires, to some degree, centralized guidance. But too much of a good thing spoils the dish. Thus, a balance must be struck and restruck continuously between too much and not enough central planning, and this requires partnership and humility on all sides,
Office Properties Outside City Centers Have A Problem
Since the pandemic began in 2020, the remote work revolution has taken hold. This tipping point was forced upon the market more quickly than employers would have preferred, but it has proven to be a net productivity booster as well as a valuable, arguably luxury asset for certain classes of workers. And if there is one thing history says about the drive for luxury, and particularly poignantly regarding Americans, it is that you do not try to take them away if you value not having a fork in your eye.
Remote work, therefore, is here to stay, in some respect. The advantages are just too numerous and the costs that were feared originally have proven to be largely phantom fears.
This leaves a glut of office properties on the market with large vacancies. Class AA space in city centers has been mostly filled up as corporations have grabbed the top-quality properties for their use, leaving many class B and C properties in suburbs and elsewhere largely vacant…and unlikely to become so again.
Multifamily Properties Being Built At Breakneck Pace Still
Meanwhile, multifamily residential properties have continued to be constructed in these same suburbs and non-city-center locations at unprecedented rates. This process has been driven by cheap capital as well as demographic and economic shifts that have resulted in first time homebuyers not doing so until age 33 on average, older homeowners being less inclined to sell and incomes rising across the board, enabling rents to rise and cap rates to compress.
The Rise, Fall And Re-Rise Of Cowork Spaces
Coworking spaces actually debuted in 1995, but didn’t really catch on until the 2010’s. There is a fairly typical pattern with adoption of new technologies, wherein the early adopters pay a price as they nearly always overshoot the mark and the market corrects violently. Coworking reached its point at the apex of the drop in 2019, as WeWork attempted to come public and was summarily beaten into submission by the street, postponing its IPO until 2021, when it finally came public at a valuation of $9 billion, a steep discount to its former attempt at a valuation of $47 billion. Today its market capitalization is approximately $1.75 billion.
But this belies the nascent underpinnings of a resurgence currently in the works. In fact, there is a close cross-functionality that coworking shares with a well-formed sense of place one might see on a bustling, walkable city street: more random, face-to-face encounters with strangers who have similar interests. These highly valuable, random occurrences can be encouraged through proper design and incentives. They are valuable because the permutations of putting like-minded people in proximity to one another (see: Silicon Valley, e.g.) spawn predictably positive growth trajectories. The more walkable a street, the more people do so, and the more they interact with each other personally. The more disparate workers sharing a common workspace, a similar phenomenon takes place, but if they collaborate economically, this can bring enormous benefits.
Peanut Butter, Meet Jelly?
It should come as no shock then, that in many locations, one way to bring home and work nearer each other could be to repurpose or replace low-performing office properties with residential units, to possibly include cowork spaces or other experimental initiatives. We need to find workable alternatives that facilitate hybrid work while contributing to a greater sense of community, and this experimentation must go through city planners and zoning officials in most cases.
A Chat With Ashley Papagni, Spokesperson For The City Of Orlando
To get a better feel for things at the city official level, I had the privilege of having several exchanges with Ashley Papgni at the City of Orlando. She had some interesting insights, including that downtown Orlando is in the process of shifting to a neighborhood from a central business and entertainment district, and has been for nearly a decade.
Many more remote workers exist nationwide, she said, and many of them have chosen to move to Florida. The city’s housing stock is growing but is being outpaced by population growth. Our conversation took place over the span of time when Hurricane Ian hit the state, which episodes she mentioned have been a popular driver of population to the city, historically.
Seeing Is Believing
If you’ve not been to downtown Orlando, these might sound like things many city planners are wrestling with, in various degrees of success. But to visit is to be impressed. Downtown Orlando is a bustling community, with a sense of place that expands outside the downtown city center to include larger neighborhoods with varying and diverse characteristics, with many sharing the core principles exhibited downtown.
One advantage of building in Orlando is the city already has mixed-use zoning districts, which streamline developers’ ability to experiment. Residential use, in other words, is already allowed in most locations where office, hotel or retail have been built. And that feature ought to benefit the city going forward as we find new ways to facilitate hybrid work with community and corporate interests.
We could say the city is a testament to the good Lord’s provision of great weather, low taxes, and fine people; but you should have seen the place when he had it all to himself.
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