The Platform

Photo illustration by John Lyman

At this rate, commercial real estate companies are going to need a bailout.

Remember the forewarnings of impending disaster? As anticipated last spring, a second wave of financial calamity is just starting to usher in a surge of bankruptcies among commercial office buildings in major cities nationwide. My earlier insight was, “Banks will begin to feel the surge of the tsunami as more buildings lose corporate tenants and then fail to attract those firms who are still looking for leased space. Vacancy rates will increase in some buildings.”

Landlords who braced themselves against skyrocketing vacancies in recent years now find themselves on the brink of another financial tidal wave sweeping across metropolitan downtowns.

From the sunny shores of Los Angeles to the bustling streets of New York City, with Chicago nestled in between, key commercial and retail properties are succumbing to a torrent of insolvencies. In Los Angeles, the owners of Ernst & Young Plaza and the Gas Company Tower, two notable properties, recently surrendered the keys. Just these two buildings alone tallied a bankruptcy worth $1.1 billion.

Chicago’s iconic Water Tower Place was forfeited to the bank. In New York City, 55 Broad Street transformed from a vacant office tower to a high-rise residential building, while 61 Broadway declared bankruptcy. Which office or retail buildings will be the next to crumble? These queries need answering not just in the twenty most populous cities, but in all urban areas.

Both property owners and property management companies must come to grips with the fact that the market won’t return to normal. Innovative ideas are necessary to repurpose buildings and add features like redundant power and broadband connectivity, intelligent amenities that can enhance their marketability.

A recent article from Visual Capitalist highlighted the top ten cities with high vacancy rates. San Francisco claimed the dubious honor of first place, though the omission of Chicago from the list is perplexing, given that its vacancy rate surpasses San Francisco’s by several percentage points.

Other cities on the list might raise eyebrows as they are relatively smaller, including Austin, Raleigh-Durham, Columbus, and Salt Lake City.

These city rankings could fluctuate dramatically overnight as more buildings nationwide lose tenants either due to attrition or a quest for more affordable, quality space. The first wave is far from over. With lease renewals on the horizon, property management firms will likely see many companies opting for less space as they adjust their corporate leasing to reflect a permanent remote work arrangement for many employees.

The article also claimed that 300 million square feet of office space would become obsolete by 2030. Though the methodology to arrive at this figure isn’t detailed, I believe it significantly underestimates the scale of the problem. In fact, a staggering 96% of office buildings are technologically obsolete today, let alone by 2030.

To assess whether a building is technologically capable of accommodating Class A tenants, consider this litmus test based on past building assessments I’ve conducted: Does it possess redundant power sourced from at least two substations via diverse routes? Is there high-speed (multi-gigabit) broadband connectivity from at least two different central offices, also on diverse routing?

The number of buildings today with redundant power and broadband connectivity on diverse routing is likely less than 4%. Consequently, any office building hoping to attract and retain a Class A tenant base, one that relies on mission-critical applications, must offer these intelligent amenities of redundant power and connectivity.

The rationale? Back in 2014, one out of three applications for enterprise networks was deemed “mission critical,” meaning no single point of failure was permissible. That ratio has now risen to one in two. If a building lacks redundant power and network connectivity, it simply cannot support Class A tenants. Upon recognizing this shortfall, corporate site selection committees will likely redirect their attention elsewhere.

Historically, property owners would hunker down during market downturns. Prior recessions were temporary, and most real estate firms took minimal action to improve their buildings. Most firms could weather the storm, anticipating a return to normalcy at some point.

This time, I believe the story will unfold differently. The paradigm shift we experienced in 2020 remains unrecognized and unaccepted by many. We’re not returning to “normal.”

James Carlini is a strategist for mission critical networks, technology, and intelligent infrastructure. Since 1986, he has been president of Carlini and Associates. Besides being an author, keynote speaker, and strategic consultant on large mission critical networks including the planning and design for the Chicago 911 center, the Chicago Mercantile Exchange trading floor networks, and the international network for GLOBEX, he has served as an adjunct faculty member at Northwestern University.