New trends in making offices attractive: high quality amenities | Downtown place values

An empty subway car during the evening commute.

Covid and post-covid work from home practices have crushed downtowns (and transit systems), which now may have 50% or fewer the number of daily worker visits.  

RTO or return to office has been promoted by cities to bring support back to Downtown commerce ("Downtown Downturn: The Covid Shock to Brick-and-Mortar Retail," JPMorganChase) and it fits in well with the long held belief that if workers aren't there, they aren't working.  Although some firms still like WFH because it reduces the amount of space they need to lease.

Crain's New York Business has an interesting article, "Why Manhattan office stocks are tanking as demand for space soars," making the point that required investments in making office buildings more attractive to companies and workers is depressing stock values, even if the spaces are profitable, compared to the many buildings that are being sold for distressed prices ("Working from home could wipe $800 billion from office values globally," CNN).  From the article:

The softening job market might still cool demand for office space. But JPMorgan believes something else explains why Manhattan office stocks are performing so poorly in such a strong market: Developers are spending heavily on the fastest elevators and the most amenable amenities. Those investments are increasing overhead and depressing cash flow, meaning shareholders must wait longer to see returns. Faced with that prospect, institutions are putting their money elsewhere.

Paolone wrote a report Monday describing how this scenario is playing out at Vornado Realty Trust. The developer has invested more than $1 billion transforming two towers overlooking Penn Station. Tenants pay up to 40% more in rent for improved space in the buildings. Verizon Communications just leased 200,000 square feet in the tower called Penn 2.

New tenants will receive roughly one year of free rent at the start of their leases, a common perk among New York’s office towers. Vornado’s “actual cash flow is pretty depressed,” until those tenants start paying rent, Paolone told Crain’s. He upgraded the company’s stock to “neutral” from “underweight,” but still doesn’t recommend buying it.

This dovetails with an interview of Aaron Stauber, whose firm Rugby Properties is the largest commercial property owner in Downtown Pittsburgh ("Where Downtown Pittsburgh’s largest private property owner thinks the Golden Triangle is headed," Pittsburgh Post-Gazette). 

Mr. Stauber has spent years investing in buildings “people give up on,” he said. Since Mr. Stauber took over One Oxford Centre, five tenants have renewed a total of 90,000 square feet of office space.

... PG: Since the pandemic, how have tenant expectations shifted as companies attempt to bring workers back into the office?

Mr. Stauber: There seems to be clear trends. Workers realized that they were working at home in a pleasant environment and they were getting work done. So, there is much more of a trend for employers — especially [companies that] want to build up their corporate community — to create office spaces that feel better for workers.

Wood finishings, 222 Second Street Office Tower, San Francisco

As a result of that, what we’re finding is that even though there is reduction in headcount, a lot of times, it’s accompanied with equal or expanded space. They’re going to put in more room to feel more comfortable, so you don’t feel like you’re a mouse in a trap. The other trend is that they’re locating in buildings that afford their employees a potpourri of non-work opportunities. That would include fitness centers … or cafes and lounge areas where tenants can get out of the workspace environment.

Compared to prepandemic, we’re actually getting significantly higher rent for our spaces because our tenants have higher expectations for our buildings. There’s an understanding that if you want to have that type of building, you’re going to have to pay for it.

Stauber says building owners can't go halfway.  They have to commit to the creation of an amenity rich space, or move on and sell. 

This section of an office building looks like a hip restaurant.

Also see "Transforming Office Amenities into Experiential Advantage," GreshamSmith, "Three amenities owners are adding to office buildings," JLL, "Evolution of Office Amenities," NAIOP, "Creating spaces for everyone: bridging the multi-generational gap," Cushman & Wakefield, "Amenities at the Edge: Where the Workplace Meets the Street," Gensler, "The Repositioning of Office Buildings: Creating Amenity-Rich Experiences in the Post-Pandemic U.S.," ArchDaily).

Separately, there is the renewed phenomenon of conversion of office buildings to residential.  This is tough, it works better with older buildings, because new buildings have a lot of interior space on large floorplates that are far from windows.

Adding residents will increase demand for the retail and cultural amenities that are currently hurting for business, but there are complications.

-- "The unintended consequences of converting office buildings to housing: the need for public safety; schools; amenities" (2022)
--"What is the competitive advantage for the post-covid city? Doubling down on place values"(2022)
--"Downtown St. Paul needs 20,000 more people to thrive | implications for urban revitalization in the post covid city" (2024)

In the 1970s, an elementary school was built on the ground floor of an apartment building in St. Lawrence neighborhood of Toronto.  This was supposed to happen in a new development in Toronto's waterfront, but was shifted to a standalone building ("Toronto’s first school in a condo was promised for the waterfront. Plans have changed — and parents are not happy," Toronto Star).  In the Flushing Commons development in Queens, NYC, a YMCA is being built as part of the second phase.

For a new hospital complex in Salt Lake, I suggested a decaying community recreation center could be shifted to a new facility--with a pool--on the ground floor.