Downtowns have certainly suffered during the COVID-19 pandemic. But not all commercial real estate professionals expect the pain to last much longer.
That’s because downtowns simply have too much to offer for companies and potential residents. As more people are vaccinated and the pandemic gradually fades, these professionals say, downtowns will rebound.
Just consider the benefits of living in the Midwest’s biggest downtowns. Jim Damiani, executive managing director with the Minneapolis office of Newmark, said that during the last five-plus years, downtown office landlords had created top-of-the-line amenities and services in their buildings. These amenities drew companies to these buildings. And these tenants were then able to advertise them when recruiting top talent.
The influx of workers to downtown Minneapolis and St. Paul spurred the development of multifamily housing and retail. As that happened, downtown became a more attractive destination for both state residents and tourists. And the new retail and housing helped draw even more workers to companies with a presence in the downtown neighborhoods of the Twin Cities.
The pandemic, though, put a halt to this momentum, Damiani said.
“The pandemic either temporarily limited or completely removed some of these experiences for downtown office employees,” he said.
But while downtown Minneapolis remains quieter today than it was before the pandemic, Damiani expects the workers and the visitors to return in the not-too-distant future.
“I believe that downtown Minneapolis will recover faster than is currently expected,” Damiani said. “Office buildings will return with a downtown experience that includes buildings with improved state-of-the-art air quality systems and cleaning standards, touch-free common areas and socially distanced ‘third places.'”
Like other CRE pros, Damiani is watching the vaccination numbers as they increase across the country. As more people receive their shots, more should also return to downtowns across the country. Employers will feel more comfortable, too, in asking their workers to return to downtown office buildings.
Damiani said that he is already seeing signs of this in the Twin Cities. About a month ago, he and his co-workers began noticing longer lines and bigger crowds at some of their favorite lunch spots. He predicts that downtown restaurants, bars and attractions will continue to see growing crowds as more people are vaccinated.
Of course, a return to work might look differently in 2021 than it did in 2019.
“One thing that has come out of the pandemic is that many companies’ leaders have recognized that employees can be productive working remotely,” Damiani said. “Firms will likely continue to use the offering of one to three days of remote work a week as a recruiting tool.”
But that doesn’t mean that companies will shed office space in big chunks.
“Office space is here to stay,” Damiani said. “People need office space for collaborations, mentorship and company culture. Many large firms in the United States implemented explorative 100 percent work-from-home in 2013 and 2014. They all eventually came back to the office.”
Bill Rolander, vice chairman with the Chicago office of Newmark, said that certain cities will bounce back from the pandemic faster than others. Those that rely heavily on public transportation, such as Chicago, Boston, New York City and San Francisco, might see a longer recovery time than those where most people drive into work.
That has been the case so far in downtown Chicago, Rolander said. Offices remain largely empty here as many workers, and the companies that employ them, remain leery of public transportation.
But Rolander does see some signs of hope.
“It’s been almost week after week since mid-February where it looks like downtown Chicago is getting quite a bit busier,” Rolander said. “It’s a feel thing at the moment, though. You look at our statistics, and our office vacancy rate is static. But there does seem to be more people out.”
Rolander said that the occupancy rate in downtown office buildings, though, remains at 10 percent at best as of mid-April. At the same time, people are still refraining from using public transportation.
But on the positive side? Newmark’s showing activity is rising, Rolander said.
“During much of the pandemic, our showing activity was next to nothing,” Rolander said. “During the first part of January, still, we’d be lucky if we were getting a couple of showings a month across our portfolio. Now, we are getting two to three showings a week. In one week recently I had a tour every day. We are seeing showings return, and that’s a positive sign.”
Rolander said that he expects smaller companies to be more active in leasing office space in the next several months. These smaller companies are nimbler and can change their plans more quickly. There is also more office supply available for these companies. As Rolander says, smaller firms have more options when it comes to leasing office space.
Rolander also sees a disparity in the type of office buildings that are performing better today. Companies that are leasing space are seeking out the highest quality of office building.
“This is something we always see,” Rolander said. “During tough times, you see a flight to quality. When things are tough, the better buildings always perform better. They seem to excel.”
In Chicago, this means that Class-A and A-plus office buildings are attracting the most activity today.
“New buildings that are recently delivered or under construction are seeing a lot of activity,” Rolander said. “The good A-Class buildings that are filled with amenities and that are well-capitalized are doing well. Those buildings are the ones seeing retention now. They are also the ones seeing new activity.”\
Downtowns, including Chicago’s, still face challenges, though. Chicago is an interesting case: The downtown market had seen the addition of a significant amount of new office construction during the last five to seven years before COVID hit.
It’s not surprising, then, that the vacancy rate in the downtown office market has jumped to what Rolander estimated was 17 percent of 18 percent. All that new space coupled with the pandemic slowdown has hurt the market.
“We have had three quarters of negative absorption,” Rolander said. “Some of that was expected, though. Even if we had not had a pandemic, we would probably have had some negative absorption because of all the new construction.”
That being said, Rolander expects brighter days ahead for urban downtowns, including Chicago’s.
“We are still the capital of the Midwest,” Rolander said. “We are still where young people who are graduating from universities in the Midwest want to move. There is a sense that this is still the city where they want to be and grow. This is still an important city. We will get through this.”