Breaking the Municipal Doom Loop: Reviving Downtowns through Office-to-Residential Conversion by Donahue Peebles III
The pandemic’s tumultuous effects have sent shockwaves through our cities, particularly within their vibrant downtowns — once nurturing grounds for economic vigor, cultural richness, and community bonds. Yet, these bustling cores have been rattled by the seismic shifts brought about by the COVID-19 pandemic. A decline in office occupancy rates has cast a long shadow over downtown property values, reducing property tax receipts and creating fiscal instability within our cities. These dynamics set in motion a perilous cycle that threatens our cities’ fiscal stability and overall well-being, we call it: a Doom Loop. To navigate this crisis, we must harness the power of data-driven solutions and seize the opportunity to strategically repurpose office spaces into residential units.
The data lays bare the grim statistics that imperil our cities. The pandemic’s far-reaching effects on our downtowns have wreaked havoc on property values. The national vacancy rate ballooned by a staggering 120 basis points year-over-year, reaching 17.8% by the end of September increasing over 80% since 2019.
The consequences are most pronounced in superstar cities like San Francisco, where the vacancy rate reached an alarming 24.2%, surging by a daunting 450 basis points over year-ago figures. Austin witnessed a concerning 360 basis point increase in vacancies, rising to 21.2%, likely fueled by recent high-volume deliveries.
The surge in office vacancy rates has a profound and interconnected impact on both asset values and property values, ultimately eroding municipalities’ fiscal positions. High vacancy rates reduce revenue and therefore net operating income, causing asset values to plummet. This loss in value is exacerbated by hawkish monetary policy, as benchmark interest rates are highly correlated with market capitalization rates. The federal funds rate has risen 5.25% since February of 2022, placing upward pressure on investors benchmark returns and therefore downward pressure on building value, keeping net operating income constant. Adverse market conditions have made sellers less willing to transact, in fact, during the pandemic, transaction volumes in major U.S. cities fell by a staggering 57%, and average sale prices per square foot dropped by 20% in real terms from 2019 to 2022.
This decline in asset values exerts immense downward pressure on property values in the vicinity. As a result, municipalities find themselves in a precarious fiscal situation: property values yield ad valorum tax revenues which have become an essential component of their revenue streams, responsible for financing essential services and infrastructure projects. For example, property taxes make up 46% of New York City’s revenue (33% in New Hampshire and 38% in New Jersey).
With reduced property values, property tax receipts dwindle, creating a domino effect that can force local governments to make tough decisions, potentially reducing services and resources available to their communities. The intricate relationship between soaring office vacancy rates, diminished asset values, and declining property values underscores the urgent need for innovative strategies like office-to-residential conversions to reinvigorate downtown areas and safeguard the fiscal health of municipalities.
To extricate ourselves from the “doom loop”, we must consider innovative and data-driven solutions. One approach is the conversion of underutilized office spaces into residential units: two asset classes with divergent trends.
Balancing Supply and Demand: Many downtowns currently suffer from an oversupply of office spaces and an undersupply of residential. This mismatch of asset classes diminishes property values. By repurposing some of these spaces into residences, we can help restore equilibrium in the real estate market.
Conversion of certain office buildings to residential use will clearly reduce the supply of existing offices but also increase demand for offices in the immediate sub-market. Proximity to housing is highly desirable to office tenants. Transforming downtown cores to vibrant, mixed-use communities will solve both the demand and supply stories.
There is clear, national demand for housing, median sales price of houses in the United States increased nearly 30% since the COVID-19 Pandemic, such growth has proven inelastic despite benchmark interest rate increases. Median US Asking Rent has grown 15% since the COVID-19 Pandemic and continues to track upward despite quantitative tightening.
To expedite this transition, municipalities should consider data-backed incentives for property owners and developers willing to convert office spaces into residential units. These incentives may include targeted tax relief, strategic zoning adjustments, or streamlined permitting processes. Many cities including New York and Washington D.C. have already debuted various incentive packages.
Cities face a formidable challenge, but it is not insurmountable. By strategically transforming underutilized office spaces into vibrant residential communities, we can infuse vitality back into our downtown areas, bolster property tax revenue, and safeguard essential services. The time has come to reimagine the use of our urban spaces and embrace innovative, data-driven strategies to ensure the resilience, vibrancy, and sustainability of our cities in a post-pandemic world.
Empty spaces and hybrid places | McKinsey
DiNapoli: NYC’s Property Tax Bills Rise Along With Burden on Working- and Middle-Class Homeowners | Office of the New York State Comptroller
State Property Taxes: Reliance on Property Taxes By State (taxfoundation.org)
Vacancy rate of downtown and suburban offices U.S. 2023 | Statista
Federal Funds Effective Rate (FEDFUNDS) | FRED | St. Louis Fed (stlouisfed.org)
Miami Beach has always been renowned for its vibrant culture, stunning beaches, and iconic Art Deco architecture. However, amid the allure of this bustling city lies a forgotten gem – The Barclay. Once a symbol of grandeur, this historic property has sadly fallen into disrepair, becoming a shadow of its former self; contributing to crime, vice and urban decay. It’s time for a change; my company, Legacy Real Estate Development, has proposed restoring the former landmark, driving revenue to the city and cleaning up the City.
The current state of The Barclay is an unfortunate reminder of urban decay. The once-thriving property has become an eyesore, contributing to blight in the heart of Miami Beach. We are offering a mixed-income, mixed-use development that will not only revitalize The Barclay but also serve as a catalyst for positive change in the community.
We focus on delivering workforce housing. This is a pressing need in Miami Beach, where skyrocketing housing costs have pushed many hardworking families to the brink of housing insecurity and where many of the City’s workers cannot afford to live. Depending on the option selected by the City Commission, our project will rent restrict up to 37 units. Despite opposition, the Barclay will provide an oasis of affordability in an otherwise costly landscape.
We understand the importance of historic preservation and ensuring that The Barclay’s rich past is respected and embraced. We are proposing small scale development, no FAR favors, no landscape of towers; instead, we favor wide setbacks, pedestrian scale and historic preservation. We will fight to have The Barclay placed on the National Registry of Historic Places, ensuring that it will remain preserved in perpetuity.
Our plan includes restoring the property’s exterior to its original splendor, ensuring that it remains a contributing building in Miami Beach’s renowned Historic District. This restoration will not only honor the city’s architectural heritage but also inject a renewed sense of pride into the community.
My company, Legacy, has partnered with Urban American a large-scale multi-family developer. Our proposal is more than just a plan on paper – it is a commitment to making Miami Beach a better place for all its residents. With our extensive track record of successful projects across the country, we bring a level of expertise that promises to deliver. They have partnered with local architects, general contractors, and property managers, forming a collaborative team that is deeply invested in the well-being of the city.
Critics argue that the City of Miami Beach should take on the renovation and operation of The Barclay, but the reality is that the city faces budget constraints, and taking on such a monumental project is financially unfeasible. Moreover, the uncertainty surrounding the city’s ability to execute efficiently will only delay the rejuvenation of this historic property further. The City has owned the property for 7 years and nothing has happened; Miami Beach cannot afford to wait.
Our proposal provides certainty. With our plan, neighbors and community members can be assured that The Barclay will be restored to its former glory, and the blight that has plagued the area will be eliminated. That’s a promise.
Further, the inclusion of workforce housing aligns perfectly with Miami Beach’s stated commitment to inclusivity and diversity. By offering affordable housing options to hardworking residents, The Barclay development will ensure that Miami Beach remains a city where everyone has a chance to thrive.
It’s time for the City of Miami Beach to embrace this opportunity with open arms. Our proposal brings much-needed private investment into the revitalization process. Based on the Commission’s guidance, we are willing to pay the city $300,000 up front, up to $200,000 per year and an additional $200,000+ in real estate taxes annually. This infusion of funds will contribute to the city’s financial health while supporting resiliency and stormwater management.
Moreover, the restoration of The Barclay aligns with Miami Beach’s commitment to environmental sustainability. Legacy and Urban American’s plan aims to achieve LEED Gold and WELL Certification, making the development not just beautiful, but also environmentally conscious and resilient.
Miami Beach has the chance to be at the forefront of positive change by embracing our proposal. Let’s choose progress over stagnation, revitalization over decay, and inclusivity over exclusivity. The transformation of The Barclay will set an example for other cities facing similar challenges, demonstrating how collaboration between the private sector and the community can create remarkable results.
“Transforming Grocery Stores into Public Utilities: The Path to Food Security for All” by Donahue Peebles
In his latest article, Donahue Peebles III proposes an innovative solution to address the issues of food deserts and food insecurity in the United States. The concept involves transforming grocery stores into public utilities, much like the United States Postal Service (USPS). By establishing government-backed public grocers, we can ensure access to affordable, nutritious food options for all Americans, regardless of their location or economic status.
Introducing public grocers into the market would promote healthy competition among grocery retailers, leading to lower retail prices for all residents. Additionally, public grocers could act as community centers, offering health education resources and empowering individuals to make informed choices about their well-being.
Read the full article on Medium to learn more about this visionary concept that aims to create a more equitable society for all.
“Rethinking Housing Affordability: The Overlooked Struggles of Middle-Income Urban Dwellers” By Donahue Peebles III
In this article, Donahue shares his knowledge and perspective on the struggles of the middle-income sector and shares potential solutions.
Current housing policies and affordable housing programs primarily focus on assisting lower-income individuals, leaving middle-income earners struggling to afford market-rate housing.
Around 9.4 million households without rental assistance spend over 50% of their income on rent or live in inadequate housing. Middle-income households in urban areas are increasingly burdened by the lack of affordable options.
Proposing a middle-income housing tax credit, inspired by the LIHTC, could alleviate the housing challenges faced by middle-income households. This initiative would subsidize housing units for those earning between 80% and 140% of the AMI, expanding their housing options and facilitating their transition to market-rate housing.
Join us as we explore the path toward a more inclusive and affordable housing market.
Real the full article at http://www.medium.com/@DonahuePeebles/