Commercial building occupancy rates are seeing a decline in major cities which should not be viewed as temporary, but permanent. This was an observation presented at a conference on January 18.

My speech focused on coping with various changes in commercial real estate because of the pandemic. Many cities and property management companies are coming to realize the shift in corporate leasing as companies start to re-evaluate their needs for office space.

In one case, a major company has looked at reducing their corporate footprint in an office building by 20% in 2021 and then, taking another reduction of 40% in 2022. Just looking at a simple example of 100,000 square feet of space reduced to 80,000 square feet in the first year and then, another 40% reduction, which would get them down to 48,000 square feet, in the second year. That would be over a 50% reduction of occupied space in two years.

Multiply that decision by 100-120 companies in a downtown area and you can see where revenues would plummet significantly for the property owners as well as a variety of lost tax revenues for the municipality and traffic to various surrounding businesses like restaurants and retail stores.

Commercial real estate companies may also feel a residual effect from the pandemic. As more people telecommute, the need for as much office space drops in many metropolitan areas. With more people not traveling into the city, the overall business traffic from other cities will also diminish.

In places like Chicago, the impact has been significant and is already in progress. A Chicago Tribune article described the amount of downtown vacant commercial office space in March as the same as five empty Willis Towers. Since then, it has only gotten worse.

Think of the game of musical chairs. As the game goes on, there are fewer and fewer seats for people to sit on and people get eliminated. Well, the reverse is happening in real estate, as more and more companies reduce their need for office space, more and more vacancies create more space coming up to be leased, and with less and less demand generated by those companies looking for space, more buildings will lose occupancy.

That available space also needs to support mission-critical applications which are prevalent in all companies. Mission-critical applications cannot be in buildings with any single point of failure. Buildings that have only one connection to get electricity from a substation or one cabling connection to a single central office providing broadband connectivity will be undesirable because they are technologically obsolete.

Classes of buildings also need to be re-ranked. If a Class A building does not have redundant power and redundant network connectivity coming into it on diverse routing, it should be ranked as a Class B building. Why? It’s technologically obsolete.

When the reverse of musical chairs is playing in all real estate areas, buildings that do not have these redundant intelligent amenities will go vacant as companies looking for space look for a building that can support mission-critical applications.

In one major city, their commuter ridership was down 90% at the height of the pandemic. A recent article claimed they saw an increase in ridership of 150%. That sounded like a great achievement, but when you do the math, it does not show any real success because a 150% increase on a number that has been reduced by 90% still comes out as significantly less than the original pre-pandemic number. Example: 1,000,000 riders-a-day down 90% is 100,000 people per day.

Increase 100,000 by 150% and you get 250,000 people. The percentage increase sounds great, but when you compare it to the original pre-pandemic number (1,000,000), you still have a huge revenue shortfall.

City leaders need to realize all the shortfalls in revenues they will incur from this shift in occupancy. Revenue streams from commuters will be reduced.

More importantly, many other taxes and fees will be significantly reduced. Any sales taxes from restaurants, retail, taxis, Uber rides, as well as fewer payroll taxes from the reduction in employees in all these service areas. In addition, hotel taxes and convention center fees will shrink due to fewer conventions being held and videoconferences taking their place which will impact parking lot fees, convention center fees, and other concession taxes.

Annual taxes and fees supporting bloated budgets are going to implode and cities cannot count on another “pandemic bailout” from the federal government. They are going to have to “cut the budget” and that is something that many have never done.

The concept of smart cities needs to be expanded and also include smart regions. Regions providing resilient connectivity and power are now a new requirement for upgrading the current infrastructure as more people work from remote areas permanently.

Mission-critical infrastructure, providing redundant power and broadband connectivity delivered in diverse routing is needed if a building and a city are to become competitive in the 21st century.