Many real estate executives face a dilemma. Which is, what should be done with buildings that are not performing well?

In the wake of the 2020 pandemic, those managing commercial real estate have navigated a paradigm shift, leaving a notable number of downtown buildings under-occupied. Optimistic expectations for a return to a pre-pandemic office culture have been dashed, as a considerable portion of the workforce has embraced the alternative of working from home. Consequently, many properties are now grappling with persistently high vacancy rates, which in turn has led to a depreciation of lease rates.

This industry has faced not just one but several transformative tsunamis of change. The initial wave was characterized by the high vacancy rates that ensued as companies transitioned to remote work. This was swiftly followed by a second wave, a ‘Deluge of Debt,’ born from the sustained high vacancy rates.

The third wave, the ‘Crash of Appraisals,’ witnessed a recalibration of property values, with many buildings selling for a mere fraction of their previous worth. In Chicago, for instance, a landmark building opposite the Willis Tower was recently sold at a staggering 90% less than its valuation from just ten years ago. Similar valuation plummets have occurred in other cities, including San Francisco, where buildings have lost half their value in a mere three years.

The experience in New York City mirrors this trend, where the challenge of commuting back to the office has been compounded by concerns over safety in downtown areas. This anxiety has had a tangible impact on property values, reflecting the influence of this wave of increased vacancies.

A fourth tsunami is now impacting the multi-tenant residential sector of real estate as well. From Chicago to Miami and beyond, condos are struggling to find buyers, further illustrating the breadth of this real estate downturn.

Buildings, whether commercial or residential, that are technologically obsolete are particularly vulnerable, facing a steep decline in marketability. Prospective tenants and buyers now prioritize spaces with intelligent amenities, such as high-speed connectivity and reliable power.

Many real estate executives had assumed this downturn would be a temporary blip, with occupancy rates rebounding quickly. It is only now becoming apparent that this is not a mere temporary shift, but a profound and lasting transformation. The pressing question now is: what should be done with buildings that are not performing well?

When faced with technologically obsolete buildings, there are five potential courses of action: do nothing, demolish the building, repurpose it, renovate it, or retrofit it with modern technologies.

Due to the widespread issue of technological obsolescence, the most viable solution for many in real estate may be to invest in new technologies and services to enhance marketability and competitiveness.

Demolition is another option, clearing the way to sell the valuable land beneath. Actions reflecting all five strategies are visible across the country, with some upgrading their properties to include advanced technologies for network broadband connectivity, while others are converting commercial spaces into residential units or demolishing them to make way for new types of developments.

Is the real estate market poised to face a fifth tsunami in 2024, or is it on the cusp of something else entirely?

Amidst these changes, crime rates in major cities continue to rise, which will undoubtedly have a negative impact on the revitalization of downtown properties and the reversal of building vacancy rates.

At this juncture, it seems that regardless of the incentives offered in leases or the intelligent amenities added to a building, if significant crime persists in the area, from robberies to shoplifting to carjackings, the incentive for individuals to return to office buildings dwindles.

The commitment to ‘come back to work’ is fragile, and without a sense of safety, it could dissipate entirely. People need to feel secure, and if cities continue to ignore the essential task of reducing crime on the streets, they will face substantial losses, as will real estate owners. The absence of foot traffic translates directly into reduced sales tax revenue.

There is a critical need for city governments to heed the wake-up call and prioritize the eradication of crime. Current policies addressing shoplifting, carjackings, and robberies are proving ineffective.

To see a resurgence in sales tax revenues and other fees to pre-pandemic levels, city officials must tackle the issue of crime head-on, implementing real consequences for repeat offenders who have forced businesses out of downtown areas. Without such measures, the ‘reversal of musical chairs’ effect on vacant office buildings will persist, leading to a continuous downward spiral of losses for real estate owners, city budgets, and the broader region.