Sunday, May 07, 2006

Vanishing downtown office towers

Just a quick pass-along tonight from Otis White's Urban Notebook (still without permalinks). I think this is a trend that will probably hit Houston soon: conversions of downtown office buildings to condos. There has been a rise of residential housing in downtown Houston, but as far as I know, we haven't yet converted a major office tower. But the vacancy rate is stubbornly high downtown - over 20% - and the real office-space action is much farther west in the Energy Corridor and Westchase. I think it's just a matter of time until we see a few conversions of the older, less desirable office towers - which could actually end up a healthy thing for downtown. I don't think we have to worry about ending up with an anemic downtown like Philly or St. Louis. It will have a healthy number of jobs for quite some time, more than any other employment center in Houston, at least according to HGAC projections.

Vanishing Office Towers
Are Downtowns Becoming Irrelevant?

One of the keenest observers of urban development around is Philadelphia Inquirer economics columnist Andrew Cassel. He asked a simple question recently about his city’s downtown: As center-city Philadelphia develops as a residential area, what’s happening to it as a business district? His answer: It’s fading fast. This isn’t just a Philadelphia story, though. It’s what’s happening with downtowns everywhere.

It’s ironic, Cassel writes, because in the 1970s and 1980s, we worried about downtowns becoming 9-to-5 places that bustled in the daytime but emptied out at night. After all, who’d want to live downtown? “Talk about having it exactly backward,” he says. “It turns out there are loads of people who want to live in or near center city — all kinds, from students and twentysomethings to empty nesters and retirees.” But, he continues, “even as the city grows more attractive as a place to live, it continues its long decline as a place to work.”

Look at the numbers. There’s about as much occupied office space in downtown Philadelphia today as in 1990, he writes, but suburban office development has mushroomed. Result: Downtown’s share of the region’s office market has shrunk from 41 percent to 27 percent. (It’s not just office space. Philadelphia has lost 9,300 professional and office jobs since 2000, even as the suburbs gained nearly 18,000.)

Downtown Philly has seen a fair amount of office construction since 1990, so how can it have no more office space than it did 16 years ago? Answer: A lot of office buildings have been converted to housing. He gives an example: the 57-story Two Liberty Place tower, half of which is being converted to condos. “Imagine: A 1989 postmodern glass-and-steel tower, a symbol of the city’s economic renaissance when it was built — and until recently among the classiest of Class A office addresses — is now obsolete and must be recycled,” he writes.

Cassel blames Philadelphia’s crushing employment taxes for the city’s decline as a business location, and he’s no doubt right that they’ve hastened the exodus. But the same trend can be found in other places. Across America, downtowns are becoming more appealing places to live and less appealing ones to work.

Take St. Louis, where office vacancies have dropped significantly in recent years. Booming economy? Hardly. It’s all those conversions of downtown office towers into condos, the St. Louis Post-Dispatch reported recently. Real estate researchers think about 1.3 million square feet of office space has been taken off the market in recent years as condo conversions or teardowns. “It’s simply supply and demand at work here,” said one developer, whose company is converting a 1920s downtown tower to condos. “There’s more demand for housing than there is for office, but there’s less supply of housing.”

So should we be concerned about the decline of downtowns as business districts? Yes. The influx of residents is a positive thing for downtowns, but we need real work to go on there. Otherwise, downtowns could become little versions of Venice: inspiring to look at, delightful to explore but otherwise irrelevant to the world of commerce.


At 11:01 PM, May 07, 2006, Anonymous Anonymous said...

I think you have raised an important point, Tory. (Oh and by the way, I really enjoyed and was appreciative of your focus on the late Jane Jacobs and her ideas during last week.) From my observations, there are three factors that are making downtowns a less attractive place for office locations: (1) High-rise urban building types often don't match the flexible, large-floorplate needs that many firms now have (for cube farms etc.); (2) Firms' desired parking supply has gone up as employee density has risen, and downtown buildings typically have dedicated parking ratios that are far below what many firms feel they require. This is even true for 1970s and 1980s buildings such as you find in Uptown. Plus, such buildings usually charge substanially for parking while suburban office parks have very low-priced (practically free) surface parking; (3) So many employees - especially key experienced employees in their 30s and 40s - have moved from inner cities, inner suburbs, and even middle suburbs (especially in Houston) to outer suburbs that companies look for suburban locations to keep these employees happy because of shorter commutes. A downtown that is centrally located in the region and has very good freeway and commuter transit access - like Houston - can fight this to some extent, but eventually firms decide it just makes more sense to locate on a highway in these upscale outer suburbs, especially if it's less congested than the radial freeways to downtown.

To be sure, some firms will always prefer to locate downtown. Major legal firms with much courthouse business are a good example. But, I think they are generally in the minority. Houston's major high-rise urban core activity centers - Downtown, Uptown, and Greenway Plaza - will have a major challenge to attract and retain general office users in the future when faced with the likes of Westchase, Sugar Land, The Woodlands, and whatever pops up on the Grand Parkway (the next suburban loop). Case in point: Uptown has not opened a new large office building - unless you count the one at the Houstonian - since 1984.

At 11:06 PM, May 07, 2006, Anonymous Anonymous said...

One more comment - I have been told that at the moment Downtown Houston actually doesn't have much supply of outdated office buildings to convert to housing, despite the high vacancy rate.

At 7:19 AM, May 08, 2006, Blogger Tory Gattis said...

Thank you very much for the insights, Steve (and the compliments - always appreciated). I totally agree - a lot of forces are working against downtown employment.

I have trouble reconciling your second comment though. The article pointed out that a relatively new building in Philly was going partial condo. If downtown truly has a 20+% vacancy rate, there has to be similar opportunities. Maybe it will require some vacancy consolidations, but it just makes sense. Maybe the old Enron building?

At 9:35 PM, May 09, 2006, Anonymous Anonymous said...

Both of you forget your history. In the early nineties downtown Houston had tons of empty space. By 2000, it had less than 2%. After an increase of 8% capacity it hovers at 20% again. The main reason it is so bad is because of Enron emptying 3 million (about 6%).

I think that in about 2009 we'll start to see occupancy heading back to single digits. As rates increase in the energy corridor some companies will look to downtown.

At 10:55 PM, May 09, 2006, Anonymous Anonymous said...

I had not forgotten our history. The late 1990s was very good time for the downtown office market; unfortunately it was a bit of an illusion generated by energy trading companies that got somewhat overzealous in their leasing (in a very rapid manner). Uptown was actually doing fairly well also into the late 1990s before the West Loop went under construction.

These areas have one advantage that really helps them: a big supply of high quality space (parking aside) at very reasonable rates when compared with tighter suburban markets. When relocating or expanding tenants need a big chunk of space, Downtown and Uptown will often be considered if for no other reason than this. In the big picture however, I believe long term trend is for the urban core to be a "second choice" office location for most firms. Did you know that the highest lease rates for Class A space (by far) are in The Woodlands? The next highest were in Westchase and the FM 1960 area.


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