Downtown is Going Downscale

      The lesson of Detroit?

“Our bet was that downtown was going to come back, and it hasn’t.” 

LA Restauranteur Claude Cognian

Want some quiet time? Head on over to San Francisco’s pricey downtown, where restaurants are closing right alongside upscale boutiques and department stores. Union Square is embracing irrelevance. Office towers have massive space for lease. Yet California weather continues to lure a homeless crowd, from the Bay Area down to San Diego. Skilled white-collar workers faced historical housing prices but got used to remote employment during the pandemic. Convincing them to return to the office has been a challenge. In-office mandates, touted to promote the synergy of meetings and proximity, seem to have fallen on deaf ears, as highly skilled employees increasingly have the leverage quit and find that remote alternative, often at higher pay. Online shopping and take-out dining have also had a profound impact on real estate usage.

Unlike jobs where hands-on product manufacturing or transportation require physical presence or where specialized equipment and staffing (think hospitals) are a necessary, sales, marketing, software development, analytics, negotiation, document drafting and review, etc., etc. are well-suited to remote work. Even desired face-to-face meetings are now routinely virtual.

The impact of this transition, accelerated with artificial intelligence, is resetting how business real estate is valued and used. Parking garages, once filled with workers’ cars, increasing lie increasingly empty. As we transition from gasoline and diesel-powered vehicles to electrified alternatives, the economic justification for “gas stations” – with giant storage tanks of volatile grades of fuel and space-eating fueling bays – will slide into charging stations in different locations where people spend more than five minutes. Workplaces. Restaurants. Retailers that survive. Museums. Sports venues. Think of all that real estate that is no longer economically justified. Can offices be quickly adapted into housing, addressing a vastly more immediate crisis? Is it too late?

Indeed, these changes will reshape cities. San Francisco is but one example: “[The] city’s downtown retailing community already appears locked in a doom loop, with Nordstrom… and Coco Republic joining a mass exodus in the past few days. Offices empty during the pandemic have stayed vacant thanks to the popularity of remote working, in turn depreciating real estate values, reducing City Hall tax receipts, squeezing public service budgets, triggering more residents and businesses to depart, so shrinking the tax base further.

“And while the city’s authorities are attempting to push through legislation to make planning quicker, encourage pop-ups, hasten retail-to-office conversions and beef up policing, the reality is that many of America’s biggest retailers have already closed their doors.” Forbes, May 11th. I write about California, not just because that is where I live, but because what happens in the Golden State is often a precursor to cities across the nation. It is true that the cost of housing, mired traffic and taxes are motivating many to leave the state entirely, but most of those wanting to leave are not exactly prepared to abandon the weather and amenities.

Los Angeles, like San Francisco, mirrors the problem: “For decades the Los Angeles financial district was the beating heart of downtown, the corporate muscle that gave the city of sprawl a soaring glass skyline. But the pandemic and the wave of remote work hollowed out its skyscrapers and helped shut many restaurants and businesses that relied on crowds of workers. Though the neighborhood shows signs of recovery, few expect it to return to being the bustling hive of suits and ties that it was.

“To many insiders — the urban planners, real estate developers and business owners with interests in it — the area will recover only if its identity grows more textured than a zone of white-collar office space… Desirable office addresses were already spreading beyond the financial district before the pandemic, as downtown experienced a renaissance in housing, art and entertainment on blocks previously shunned by investors and residents.

“To the south, billions of dollars were spent improving the blocks around Crypto.com Arena with hotels, housing and entertainment venues. Obsolete century-old commercial and industrial buildings to the east were renovated into desirable housing and fashionably unconventional offices. Billions more were spent north on Bunker Hill, where the Music Center (including Walt Disney Concert Hall) and office skyscrapers have been joined by museums, apartments and a high-rise hotel… The housing boom drew residents to the financial district as well, and that has kept it from turning into a ghost town.

“But for the area to truly come back to life, many say it will need to follow the path of Lower Manhattan. The financial capital of New York faced an exodus after 9/11, but city officials and investors staved it off by making it a place of more diverse uses. It is still an office district but is far more lively than it used to be since it also became a residential neighborhood with more shops, restaurants, parks and hotels than it had before the attacks. A performing arts center will open in September.

“‘Cities evolve. That’s what they do,’ said downtown L.A. business representative Nick Griffin. ‘From natural disasters, wars and pandemics. They evolve with market changes, customer preferences and cultural shifts. Downtown has evolved pretty dramatically over the last 20 years, and the next five or so are going to be very interesting.’” Roger Vincent writing for the June 25th Los Angeles Times. Across America, changes in technology, economic realities, the waning need to centralize and the rising costs of operating within big city limits are pushing urban planners to new models.

Shopping malls seem to survive only to the extent that they become destination centers with much more than just a lot of shops. Multiplex theaters are no longer cherished anchor tenants. These changes are exploding, and for those larger municipalities not able to adapt fast enough, take a good look at what happened to Detroit (above) when automakers decentralized and automated. We need to learn from our mistakes. But even mixed use has its limits. Manhattan has always been about mixed use, but housing costs are spinning out of control. What are the answers? Can we save cities? All of them? The answer is coming faster than we may wish. Opportunity or endgame?

I’m Peter Dekom, and the destabilizing hyper-acceleration of change is at the root of our polarization, and it is rapidly redefining how and where we will live and work in the immediate future.