The context for this is ‘will new york city ever come back’. I’ve had this conversation a lot over the past few weeks, I think because it’s warm enough for people to start to feel like they live in a city again, but also because a lot of people have successfully executed their plan to leave.
Doubters say ‘nyc has weathered a disaster every decade, we’ll be fine’, or ‘employers don’t want to manage remotely’. The doubters are experiencing extreme dissonance. If you ask them ‘will things be exactly the same post recovery’ they’ll say no. If you ask them ‘what % of companies will close or reduce their commercial footprint’ they’ll say a lot.
We’re facing an inflection point in our use of space. It’s not robert moses deciding to build a highway or a beach (or wiggle the northern state around west egg to avoid elite dissent). It’s every knowledge worker worth a crap voting with our feet at once. We’re rezoning every third square foot of CBD office space – not by lobbying, or by greasing palms, but simply refusing to occupy it.
Business districts are tissue that has lost its blood supply. Cities can adapt by allowing downtowns to be redesigned, or they can die.
- Peak office
- Napkin math
- Arcologies, but Jane Jacobs or Le Corbusier?
- Preferences arguments from the doubters
- My point: zoning
There’s no model of normalized wfh that looks good for commercial occupancy. Old companies will never come 100% back, and new companies will have more aggressive hybrid models.
Pick your own numbers. Young startups have 60-80% support for hybrid or remote-first, depending on the specific question. From this I ballpark 1/3 remote for existing companies and 2/3 remote for new ones. Under my scenario, the sublet market completely satisfies all commercial real estate needs until the number of companies doubles.
It doesn’t matter what numbers you pick. Companies are about to become vastly more efficient at extracting value from office space. The level of economic growth that would support growth in commercial real estate footprint under this pressure is ludicrous.
Commercial leases are pretty long, but like the crazy nastyass honey badger, the sublet market doesn’t care – it doesn’t give a shit, it just takes what it wants. It has no regard for any other animal whatsoever. If it’s hungry it’s hungry.
Our cities are built on the assumption that dense city office space is far more lucrative than residential. We’re designed and zoned for this assumption. But everything changes if urban offices are no longer the limiting reactant for knowledge work.
The ratio between commercial and residential invisibly defines a lot of what I experience as a city dweller, and it’s about to drastically shift – perhaps not enough to seriously dent residential rents, but probably enough to free up a lot of space that we’ll have to fill creatively. Forgotten categories of mixed-use may creep back in.
If some kind of mixed residential infiltrates former office towers, what’s the price point?
There are about 2 million housing units in the five boroughs per nyc.gov’s housing plan. 1.6 million people live in manhattan, so assume 600k units = 600 million square feet (generously) = something like $35 billion annually if they were all rentals (they’re not).
Rough guesses, but some things to note:
- per square foot, commercial is 2x more lucrative than residential – landlords won’t convert commercial to residential without a writedown, but they’re broadly comparable
- an event that opened up 10% of commercial real estate, and say 10% of residential real estate (as remote workers leave), is a pretty large supply shock that dwarfs any demand spike I can think of. We’ll need to think of creative uses for this space
- 20% more space for everyone doesn’t turn manhattan into dallas texas. A developer’s challenge, given time constraints and the need to refit, is ‘giant empty buildings that need to invent new, in-demand categories’
Arcologies, but Jane Jacobs or Le Corbusier?
If you’re like me you gave up in the middle of Seeing like a State, the long-winded poli sci book about how governments ruin artificial forests possibly. One of the chapters is about the difference between Jane Jacobs (death and life of american cities, organic mixed use, big sidewalks) vs Le Corbusier (central planning, Brasilia, lives and jobs precisely planned, giant sterile commuting corridors).
(If you’re like me you also played SimCity as a kid and can name the four kinds of arcologies).
If you’re adopting a skyscraper that has become vacant due to commerical real estate consolidation, what do you put in it? We already have vertical Le Corbusier: buildings zoned for one thing on most floors, commuting the glue between residential and commercial, and most recreation happening behind some kind of closed door (whether that’s a home or a restaurant).
The alternative is vertical Jane Jacobs: a single skyscraper with mixed residential + commercial, lots of retail, and some kind of ‘sidewalk’ – a plentiful, flexible and accessible public space that’s truly public and very close to the home.
‘Vertical farming’ comes up in these conversations, a technology that uses 15x more energy than a greenhouse. I think it misses the question here – the question isn’t just ‘what do you do with empty space’. The situation is a generational inflection point in demand, because commuters are no longer forced to commute as often to scarce central spaces. The question is ‘what generates comparable revenue by reviving demand’.
Light industrial is a possibility, the fancy tailors that have moved to the burbs, the fancy cabinetmakers that have moved to queens and the bronx. ‘Industrial for export’ may still not make sense, but industrial for local high-margin spenders could work out.
A 20 percent change in available residential space isn’t enough to build mcmansions, but it could be used for extra bedrooms or balconies at the same price point, or a reduced price point for the same size place. It could also improve life by going to new shared services (bigger restaurants, better supermarkets, indoor ballfields and go kart tracks) rather than more individual space.
I’ve always been fascinated by the Kowloon Walled City, a section of Hong Kong that was demolished a few decades ago but was basically a dense unzoned cube with no building code enforcement, daisy-chained electrical wiring, and as organic a take on mixed use as it gets. Maybe that’s us in 18 months.
Preferences arguments from the doubters
Economics is about the push-pull of markets and money limits on what we can afford, but agents also have preferences. Obviously companies that are no longer viable post 2020 will reduce their commercial footprint significantly. But some businesses are as good as before or better. They still may alter their footprint.
By changing their use of space, and refusing to use the space allotted to them, commuters are voting with their feet and rezoning city centers by force, without asking anyone. Zoning boards, employers, and city governments can oppose this trend but they can’t really resist it.
‘Managers want their people on site’ is a line I’ve heard. This is probably right.
I’ve heard ‘employees like the freedom of wfh’ but also ‘employees are stir crazy and ready to go back in, they have zoom fatigue’. That said, I’ve been hiring and nobody is like ‘you had better have an IRL office’, and everyone is like ‘can I wfh 2 days’.
Also, ‘ready to go back in’ != nyc. Goldman is rumbling to go down to Miami I think, because their employees want it and there’s less reason not to. JP Morgan tried to return relatively early in the pandemic and it was a disaster, and my guess is that leadership’s preferences changed after that.
It’s not clear whose preferences rule between employer + employee, but managers are employees too. Also the best people can leave. It feels (anecdotally) like the people who are most attached to out-of-company networks, selling, and value creation are most willing to leave the city. Being precious about wfh / nyc presence may be a way to rapidly lose everyone good.
‘Parents are frazzled from childcare’. Bad argument. We can go back to school without going back to work.
I’ve heard ‘companies can’t solve the logistics of 60% therefore wfh doesn’t shrink square footage’, or ‘60% time may still require the same peak # of desks’. Wrong. Money is precious and hotdesking isn’t a new invention. People will figure it out.
My point: zoning
Zoning destroys communities. Zoning is like saying undergrowth and tall trees should be grown on separate plots. In practice it kills forests. The undergrowth and the canopy rely on each other.
I hate midtown, but I’m excited to live in an arcology.
The best knowledge workers are as portable as they’ve ever been. When Marissa Mayer’s first action at yahoo was to cancel 2-day remote deals, we wondered if it was a death knell for remote work or for yahoo. In retrospect it was the latter.
Managers are labor too. The good ones won’t force people to come in if there’s no reason to. Companies that use policy to oppose these perks will succeed in driving out their clear thinkers. They’ll also increase their real estate costs. Good luck to them.
The places that apostate labor moves to, and the places that they build on the rubble of the old system, will be smarter, healthier, and more fun than what we have now.
Adopt a skyscraper today.
This faq nyc episode is about dark retail (starting 18:00ish) and rezoning legislation in new york state. From one of the guests, a bryant park office building rezoned as residential, specifically to an ‘office condo’ category that is apparently high demand.