{"id":4054,"date":"2022-10-19T02:27:58","date_gmt":"2022-10-19T02:27:58","guid":{"rendered":"https:\/\/imsfund.com\/?p=4054"},"modified":"2022-10-19T02:27:58","modified_gmt":"2022-10-19T02:27:58","slug":"the-coming-collapse-of-downtown-office-real-estate","status":"publish","type":"post","link":"https:\/\/imsfund.com\/index.php\/2022\/10\/19\/the-coming-collapse-of-downtown-office-real-estate\/","title":{"rendered":"The Coming Collapse of Downtown Office Real Estate"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<div :class=\"{ 'hidden': $store.proContent.showFullPrompt() }\">\n<section class=\"px-4 relative border border-slate-200 mobile-toc lg:hidden\" x-data=\"{open:false}\"><button class=\"flex items-center gap-4 my-2 border-none w-full\"><br \/>\n<svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"h-6 w-6\" fill=\"none\" viewbox=\"0 0 24 24\" stroke=\"currentColor\" stroke-width=\"2\"><path stroke-linecap=\"round\" stroke-linejoin=\"round\" d=\"M4 8h16M4 16h16\"\/><\/svg><\/p>\n<h2 class=\"font-semibold text-slate-800 text-base m-0 js-toc-ignore\">In this article<\/h2>\n<p><\/button><\/p>\n<\/section>\n<p><span data-preserver-spaces=\"true\">After incredible appreciation over the past few years, the residential real estate market has\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/home-prices-are-declining-should-investors-panic\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">finally started to decline<\/span><\/a><span data-preserver-spaces=\"true\">. Many chicken littles are saying this is the beginning of an all-out collapse. While the market will almost certainly go through a correction, a collapse is\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.youtube.com\/watch?v=U3mmU0mRlL0\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">almost certainly not in the cards<\/span><\/a><span data-preserver-spaces=\"true\">. There is a segment of real estate, however, that will go through something close to a collapse.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Broadly speaking, the outlook for commercial real estate, specifically office buildings, is not great. And large office buildings, in particular, are doing poorly and will have difficulty in the coming years. It will be even worse in large, coastal cities, particularly acute in downtown areas, with San Francisco being the poster child for this coming collapse.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Indeed, if such a thing as credit default swaps or some sort of short position on downtown San Francisco real estate, I would strongly recommend thinking about buying such (I believe non-existent) investments.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">As\u00a0<\/span><em><span data-preserver-spaces=\"true\">The San Francisco Standard<\/span><\/em><span data-preserver-spaces=\"true\">\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/sfstandard.com\/business\/san-francisco-braces-for-epic-commercial-real-estate-crash\/?fbclid=IwAR0qr8Eol8V5f-jZnIMDU2OGtsHa_aW4DxoSk_bGroUNhXeR7zdOSjkuHro\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">points out<\/span><\/a><span data-preserver-spaces=\"true\">,<\/span> <span data-preserver-spaces=\"true\">\u201cCiting data from real estate firm JLL, chief economist Ted Egan tagged future vacancies, in a worst-case scenario, as high as 53% in the Jackson Square area and 43% in the mid-Market area in 2024 as the clock runs out on office leases.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">\u201cThe current vacancy epidemic cuts across buildings of all sizes and price ranges in San Francisco\u2019s downtown core, from the struggling mid-Market area to the sparkling office towers of the East Cut.\u201d<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">For some buildings, the collapse has already happened,<\/span> <span data-preserver-spaces=\"true\">\u201cFor example, 415 Natoma, a 653,900 square foot office tower owned by Brookfield Properties that was the sole ground-up office project to deliver in San Francisco in 2021, currently has just one announced lease: 20,000 square feet taken by \u2018remote-first\u2019 startup Thumbtack.\u201d<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">The reason we can know for certain that this problem is going to get worse is the way commercial leases are structured. Unlike the typical lease on a home or apartment unit, commercial leases are\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessnewsdaily.com\/15101-commercial-lease-guide.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">usually 3-5 years long<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0and sometimes more.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Downtown commercial real estate was already declining before 2020, but the pandemic turbocharged that decline. Many of the firms that signed leases in 2017, 2018, and 2019 are stuck in those leases for a few more years. But all signs point toward a large number of them leaving after the end of their lease.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">So, if you think vacancy is high now, I\u2019d recommend you buckle up.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">As I noted, San Francisco is only the poster child for this phenomenon. San Francisco came in dead last in the\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.downtownrecovery.com\/dashboards\/recovery_ranking.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Urban Displacement Project\u2019s ranking<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0of 62 cities\u2019 downtown recoveries from Covid and lockdowns. But the rest didn\u2019t do well either. Only four of 62 cities had fully recovered, with the average being somewhere in the 60% range (San Francisco was at 31%).\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">This has, quite understandably, led analysts at the <a href=\"https:\/\/itep.sfo2.digitaloceanspaces.com\/20211101_PropertyTaxReport.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">Institute of Taxation and Economic Policy<\/a>\u00a0to project huge losses\u00a0in downtown commercial real estate, with San Francisco coming in first (or, more accurately, last).<\/span><\/p>\n<h2><span data-preserver-spaces=\"true\">High Office Vacancy All-Around<\/span><\/h2>\n<p><em><span data-preserver-spaces=\"true\">As The Business Journal\u00a0<\/span><\/em><a class=\"editor-rtfLink\" href=\"https:\/\/www.bizjournals.com\/bizjournals\/news\/2021\/11\/03\/downtown-office-vacancy-rate-suburban-rate.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">notes<\/span><\/a><span data-preserver-spaces=\"true\">, \u201cOffice vacancy is on the rise everywhere, but the rate of increase in downtown office vacancy is outpacing that of suburban office.\u201d\u00a0\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">They quote Ian Anderson, senior director of research and head of Americas office research at CBRE, who points out that,<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">\u201cDowntowns across the U.S. have gotten clobbered much more through the crisis\u2026People have been much more comfortable driving to work in suburban locations with less density, so that\u2019s favored them more.\u201d<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Indeed, downtown Los Angeles office space has\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.globest.com\/2021\/11\/12\/dtla-office-vacancy-rate-climbs-to-25\/?slreturn=20220902005355\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">hit 25% vacancy<\/span><\/a><span data-preserver-spaces=\"true\">. In Manhattan, it\u2019s\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/therealdeal.com\/2022\/07\/06\/manhattan-offices-continue-struggle-as-downtown-hits-new-low\/#:~:text=The%20vacancy%20rate%20in%20Manhattan,record%2017.4%20percent%20vacancy%20rate.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">over 17%<\/span><\/a><span data-preserver-spaces=\"true\">, downtown Portland, Oregon, is at\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bizjournals.com\/portland\/news\/2022\/08\/10\/downtown-portland-shuffle-and-whos-moving-in.html#:~:text=The%20downtown%20vacancy%20rate%20stood,from%2013%25%20in%20Q2%202019.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">26% vacancy<\/span><\/a><span data-preserver-spaces=\"true\">, and in Washington D.C., it stands at\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bisnow.com\/washington-dc\/news\/office\/dcs-office-market-has-no-clear-saviors-as-vacancy-ticks-up-113699\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">20%<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">And all of them have the same problem with pending move-outs once pre-Covid leases expire.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Typically, suburban vacancy rates are substantially higher than downtown rates. But the latest report from CBRE has shown the two rates have not just compressed but\u00a0<\/span><a class=\"editor-rtfLink\" href=\"http:\/\/cbre.vo.llnwd.net\/grgservices\/secure\/Q2%202022%20U.S.%20Office-Figures.pdf?e=1664730565&amp;h=0b9ff7eb3e1591dd4550773afdfc9e8b\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">actually flipped<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n<figure class=\"wp-block-image size-full\"><picture class=\"wp-image-145202 sp-no-webp\" title=\"The Coming Collapse of Downtown Office Real Estate 2\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE.webp 512w,https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE-300x199.webp 300w,https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE-340x225.webp 340w\" sizes=\"(max-width: 512px) 100vw, 512px\" type=\"image\/webp\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE.png 512w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE-300x199.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE-340x225.png 340w\" sizes=\"(max-width: 512px) 100vw, 512px\" type=\"image\/png\"><img decoding=\"async\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE.png\" loading=\"lazy\" class=\"wp-image-145202 sp-no-webp\" title=\"The Coming Collapse of Downtown Office Real Estate 2\" alt=\"CBRE \" height=\"340\" width=\"512\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE.png 512w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE-300x199.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/CRBE-340x225.png 340w\" sizes=\"auto, (max-width: 512px) 100vw, 512px\"\/><\/source><\/source><\/picture><figcaption><em>Suburban and Commerical Vacancy Rates (2006-2022) \u2013 <a href=\"https:\/\/www.cbre.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">CRBE<\/a><\/em><\/figcaption><\/figure>\n<p><span data-preserver-spaces=\"true\">The increase in vacancy rates has tapered off this year (for now) as Covid receded and various restrictions have been lifted. Even still, vacancy rates have leveled off over 50% higher than where they were before the pandemic.<\/span><\/p>\n<h2><span data-preserver-spaces=\"true\">The First Cause: The Pandemic and Downtown Deterioration\u00a0<\/span><\/h2>\n<p><span data-preserver-spaces=\"true\">Obviously, the immediate cause of this commercial real estate calamity was Covid-19 and the subsequent lockdowns.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">A report from\u00a0<\/span><em><span data-preserver-spaces=\"true\">The Visual Capitalist<\/span><\/em><span data-preserver-spaces=\"true\">\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.visualcapitalist.com\/mapped-uneven-recovery-of-u-s-small-businesses\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">noted<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0in September 2020, during the first year of the pandemic (but after the most severe lockdowns had been lifted), that small business revenues in 52 American metro areas were down between 13%-49%. (And, of course, San Francisco was the city where they were down 49%). Furthermore, \u201cSmall businesses in the leisure and hospitality sector [had] been particularly hard hit, with 37% reporting no transaction data.\u201d<\/span><\/p>\n<p><em><span data-preserver-spaces=\"true\">The New York Times<\/span><\/em><span data-preserver-spaces=\"true\">\u00a0also\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/sorryclosedsmall-businesses-struggling-states\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">pointed out<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0that as many as 400,000 small businesses closed, and many went under, never to return.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Downtowns were hammered during the height of Covid, with places like Manhattan\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.youtube.com\/watch?v=rYTNO_WtNys\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">looking like a ghost town<\/span><\/a><span data-preserver-spaces=\"true\">. And while things have gotten better since then, the damage done cannot easily nor quickly be fixed, especially since many downtowns have notably declined in quality since then.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">A lack of proper maintenance and upkeep causes deterioration, making fewer people want to visit or work there, reducing the area\u2019s revenues and funds available for maintenance and upkeep even more so, and the vicious cycle perpetuates itself.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Other policies have also caused significant issues as well. Unlike some memes you may have seen, California did not actually legalize stealing $950 or less, but it did\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.hoover.org\/research\/why-shoplifting-now-de-facto-legal-california\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">downgrade and deprioritize such crimes<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0leading to a noteworthy uptick in shoplifting which has led multiple retailers to relocate. Walgreens, for example, has\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.sfgate.com\/bayarea\/article\/Another-San-Francisco-Walgreens-closing-16848319.php\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">closed 10 stores in the city<\/span><\/a><span data-preserver-spaces=\"true\">, including several downtown and cited \u201corganized retail crime\u201d as a leading cause.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">In general,\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2022\/08\/11\/us-murder-rates-stayed-high-last-year-but-trend-may-be-reversing-.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">crime is on the rise<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0throughout the country, and that tends to be worse in densely populated areas, which makes downtowns less desirable.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">The\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/en.wikipedia.org\/wiki\/Martin_v._Boise\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Martin v. Boise decision<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0also made it difficult to remove homeless encampments from downtown areas unless the city has sufficient homeless shelter beds for its homeless population. Unfortunately, very few cities have enough beds to do so, and California\u2019s \u201chousing first\u201d instead of a \u201cshelter first\u201d policy\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/michaelshellenberger.substack.com\/p\/three-times-more-homeless-die-under\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">has resulted in a much larger homeless population<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0sleeping on the streets at night. Thus, tent cities accumulate in high-density areas and often dissuade foot traffic and lower demand.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Unfortunately, as things get worse, they tend to spiral out of control as you reach a point where people don\u2019t see the point in putting in any effort to improve a situation because their effort would make almost no difference.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Why pick up litter in a garbage dump? In fact, why not litter yourself?<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">This has gotten so bad in San Francisco that someone even made an interactive \u201cpoop map,\u201d and the number of \u201chuman feces incidents\u201d on the streets, showing that it had increased by over 500%, even before Covid struck.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">And again, while I\u2019m clearly picking on San Francisco, this is a problem in many large coastal cities and really throughout the country as well.\u00a0<\/span><\/p>\n<h2><span data-preserver-spaces=\"true\">The Second Cause: Work From Home<\/span><\/h2>\n<p><span data-preserver-spaces=\"true\">A while back, flex work was all the rage, and futurists dreamt of a time where everyone would work from home and live happily ever after. Then Covid hit, and those dreams were, more or less, realized.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">And it turns out that working\u00a0<\/span><em><span data-preserver-spaces=\"true\">only<\/span><\/em><span data-preserver-spaces=\"true\">\u00a0from home drives a lot of people crazy.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">That being said, many (probably most) people love the option of working from home and want to be able to do so 1-2 days per week. And there are some who prefer it and would like to work from home all the time.\u00a0\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">The Census reported that the number of people working from home\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.census.gov\/newsroom\/press-releases\/2022\/people-working-from-home.html#:~:text=SEPT.,by%20the%20U.S.%20Census%20Bureau.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">tripled between 2019 and 2021<\/span><\/a><span data-preserver-spaces=\"true\">. Companies like\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.forbes.com\/sites\/jackkelly\/2022\/03\/05\/twitter-employees-can-work-from-home-forever-or-wherever-you-feel-most-productive-and-creative\/?sh=7add50a915e4\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Twitter<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0(but certainly not\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessinsider.com\/elon-musk-tesla-remote-work-return-office-or-quit-report-2022-6?IR=T&amp;r=US&amp;utm_medium=referral&amp;utm_source=yahoo.com\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Tesla<\/span><\/a><span data-preserver-spaces=\"true\">) now allow employees to work from home as much as they want.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">A survey by McKinsey &amp; Company\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.mckinsey.com\/industries\/real-estate\/our-insights\/americans-are-embracing-flexible-work-and-they-want-more-of-it\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">found that<\/span><\/a><span data-preserver-spaces=\"true\">\u00a087% of employees who are given the chance to work from home take it at least sometimes. They further found that 35% of job holders can work from home full-time and 23% part-time.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">That seems a bit high to me, but such arrangements are certainly on the rise. Further, some research shows that people who work from home some of the time can\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.gsb.stanford.edu\/faculty-research\/working-papers\/does-working-home-work-evidence-chinese-experiment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">be even more effective<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0than those who only work at the office.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">What this means for commercial real estate is that we don\u2019t need as much office space as we did before. Sure, companies still need offices (working only from home makes a lot of people feel really \u201ccooped up,\u201d and zoom meetings can\u2019t completely replicate the real thing). But those spaces don\u2019t need to be as big. And we don\u2019t need as many of them.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Furthermore, the ones that will be hit the hardest are the ones that require the longest commutes to get to. I know I would be much more apt to work at home if my commute was two hours of traffic!<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">And in the spirit of continuing to bash San Francisco, the average commute for San Francisco residents is the third worst in the U.S. at\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessinsider.com\/worst-commutes-in-us-ranked-2019-6#2-washington-metropolitan-area-maryland-and-virginia-49\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">34.4 minutes each way<\/span><\/a><span data-preserver-spaces=\"true\">. The worst is New York at 37 minutes, and the national average is\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.census.gov\/content\/dam\/Census\/library\/publications\/2021\/acs\/acs-47.pdf\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">27.6 minutes<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Lastly, as BiggerPockets\u2019\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/contributors\/benleybovich\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Ben Leybovich<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0pointed out, \u201cAnother major issue is vintage and the functional obsolescence that comes with it. Huge swaths of commercial real estate in old primary markets are aging. Before the pandemic, people were in those units by inertia. Now, nobody wants to go back there.\u201d<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">It will cost huge sums of money to upgrade these outdated and sometimes obsolescent units.<\/span><\/p>\n<h2><span data-preserver-spaces=\"true\">Risks and Opportunities<\/span><\/h2>\n<p><span data-preserver-spaces=\"true\">Needless to say, right now is not the time to be buying downtown office real estate. Offices, in general, are something investors should be cautious of. But if you are going to buy office space, smaller units and buildings are safer. As far as commercial real estate goes, restaurants, industrial and retail are a better bet (although with retail, large outlets are still at risk of being bled out by Amazon).\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">That being said, every bear market has a trough. There will continue to be demand for office space in the future, and there will continue to be demand in downtown areas. We have, after all, seen this story play out once before. Downtowns throughout the country deteriorated drastically in the 1970s\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.forbes.com\/sites\/joelkotkin\/2014\/12\/01\/the-curious-comeback-of-u-s-downtowns\/?sh=42b3a22c622d\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">before making a major comeback<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0in the 1990s and 2000s.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Right now, there is still an enormous housing shortage in the United States. In 2020, Freddie Mac released a report arguing there was a\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.freddiemac.com\/research\/insight\/20210507-housing-supply\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">3.8-million-unit shortfall<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0in available housing units. And the pandemic and lockdowns slowed new construction to exacerbate that gap.\u00a0\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">The National Association of Realtors even has an interactive housing shortage tracker with a map of where the problem is the most acute.<\/span><\/p>\n<div class=\"tableauPlaceholder\" id=\"viz1666109870774\" style=\"position: relative\"><noscript><a href=\"https:\/\/www.nar.realtor\/\"><img decoding=\"async\" alt=\"HST-Allupdates \" src=\"https:\/\/public.tableau.com\/static\/images\/HS\/HST2018-All\/HST-Allupdates\/1_rss.png\" style=\"border: none\" title=\"The Coming Collapse of Downtown Office Real Estate 3\"\/><\/a><\/noscript><\/div>\n<p><span data-preserver-spaces=\"true\">As you can see, the biggest housing shortages are in many of the same areas that are having and will continue to have severe vacancy issues in commercial real estate.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Despite crime and livability issues, many people love living downtown and being \u201cclose to the action.\u201d Once the bottom falls out (probably around 2024), there should be major opportunities to convert old office buildings into swanky condos and apartments.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Sure, it will be very capital intensive, but for those looking for big projects in the relatively near future, this is definitely something to keep an eye on.\u00a0<\/span><\/p>\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block    has-background has-slate-200-background-color has-text-color has-slate-900-color\">\n<div class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n<div class=\"relative z-30 lg:w-2\/3 \">\n<main class=\"py-4\"><\/p>\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Run Your Numbers Like a Pro!<\/p>\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Deal analysis is one of the first and most critical steps of real estate investing. Maximize your confidence in each deal with this first-ever ultimate guide to deal analysis. <em>Real Estate by the Numbers<\/em> makes real estate math easy, and makes real estate success inevitable. <\/p>\n<p><\/main><\/div>\n<div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n<picture class=\"object-cover w-full relative z-20 my-0  rounded-md sp-no-webp\" title=\"The Coming Collapse of Downtown Office Real Estate 4\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/REBN_cover_mockup_01-e1663957420549.webp\" type=\"image\/webp\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/REBN_cover_mockup_01-e1663957420549.png\" type=\"image\/png\"><img decoding=\"async\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/REBN_cover_mockup_01-e1663957420549.png\" class=\"object-cover w-full relative z-20 my-0  rounded-md sp-no-webp\" title=\"The Coming Collapse of Downtown Office Real Estate 4\" alt=\"real estate by the numbers\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/REBN_cover_mockup_01-e1663957420549.png\"\/><\/source><\/source><\/picture><\/div>\n<\/div>\n<\/div>\n<p class=\"italic\"><b>Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n<\/div>\n<p><br \/>\n<br \/><a href=\"https:\/\/www.biggerpockets.com\/blog\/the-coming-collapse-of-downtown-office-real-estate\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this article After incredible appreciation over the past few years, the residential real estate market has\u00a0finally started to decline. Many chicken littles are saying this is the beginning of an all-out collapse. While the market will almost certainly go through a correction, a collapse is\u00a0almost certainly not in the cards. There is a segment [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":4055,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"fifu_image_url":"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/10\/commercial-crash-1024x517.jpg","fifu_image_alt":"","footnotes":""},"categories":[9],"tags":[],"class_list":["post-4054","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts\/4054","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/comments?post=4054"}],"version-history":[{"count":1,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts\/4054\/revisions"}],"predecessor-version":[{"id":4056,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts\/4054\/revisions\/4056"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/media\/4055"}],"wp:attachment":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/media?parent=4054"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/categories?post=4054"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/tags?post=4054"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}