66 Finance & economics TheEconomistFebruary19th 2022
are offering more freebies than ever to re
tain tenants or attract new ones. In Man
hattan, cash gifts for tenants—typically
used for kitting out new office space—have
more than doubled since 2016. Across
America, the average number of rentfree
months has risen to its highest since 2013.
Some property developers remain opti
mistic, betting that demand for office
space will eventually bounce back. But
with each new variant of covid19, plans for
a widescale return to the office have been
delayed, and delayed again. And changing
patterns of attendance look set to reduce
the overall demand for space.
Financial markets reflect the darkening
mood. Offices, particularly in business dis
tricts, are rapidly losing ground to better
performing areas of property such as ware
houses and apartments. Having tradition
ally formed the core of commercialprop
erty portfolios in America, offices account
ed for less than a fifth of transactions in- Globally, investors spent more on
apartments for the first time. Foreign in
vestment into offices also fell below the
prepandemic average in countries such as
Americaand Australia in 2021. By contrast,
foreign investment in warehouses more
than doubled in these markets.
Valuations mirror the uncertainty, too.
Prices of buildings in business districts
have taken a hit even as commercialprop
erty prices have boomed in other parts of
cities. In San Francisco’s Financial Dis
trict, for example, property prices have
slumped by nearly a fifth since the end of
2019, according to the latest figures. Across
the broader metropolitan area, they have
increased by more than 5%. In Manhattan
they have fallen by around 8% since the
start of the pandemic. Asian cities have
fared better. Office prices across Seoul, for
instance, have risen by more than a third
since the end of 2019. In Singapore they are
up by more than a tenth.
Most investors take a longterm view,
so capital allocated to offices will be locked
in for years. But sentiment is shifting away
from cities with a large concentration of
offices and towards smaller markets with a
broader mix of buildings. A survey of in
vestors with assets under management of
more than $50bn by cbre, a property firm,
showed a preference in 2021 for markets
like Phoenix and Denver over New York
and Chicago. The biggest business hubs
will no doubt continue to attract large
sums: London’s offices are forecast to at
tract £60bn ($81bn) of overseas capital over
the next few years, according to Knight
Frank. But deserted office blocks in dense
commercial districts will continue to cast
an ominous shadow.
Landlords insist concerns are over
blown. Despite many buildings remaining
stubbornly empty, they maintain that de
mand for the best space is holding up. True,
some prime properties still attract plenty
of suitors. Tenants are increasingly swap
ping ageing office blocks for modern,
greener workplaces with better airfiltration systems and higherqualityameni
ties.Butthesehighendpropertiesrepre
sent20%orlessofbuildingsinmostcities.
(Theydo,however,makeupa dispropor
tionate share of investment activity: in
NewYork,justnineoutof 69 officetran
sactionsaccountedfor 80%ofthetotal
amountinvestedin2021.)
Thegapbetweenthebestassetsandthe
restofthemarketwillwidenfurther.Re
furbishmentsmayrejuvenatesometired
lookingbuildings.Formanyolderassets,
however,inflation,shortagesoflabourand
materialsintheconstructionindustryand
thehighcost ofupgrading buildings to
meet tougher environmental standards
willmakeit hardertojustifytheexpense.
The consequences for business dis
tricts could be farreaching. The mass de
parture of bankers, lawyers and other pro
fessionals also hurts the cafes, restaurants
and other small businesses that serve
them. Many were already struggling with
supplychain disruptions, labour short
ages and rising costs. Lockdowns cost Syd
ney’s economy an estimated A$250m
($178m) a week and 40,000 jobs. Across
New York City, more than a third of small
businesses closed during lockdowns; be
fore the pandemic the sector accounted for
over half of privatesector jobs in the city. Civic slide
Municipal finances, too, are exposed. Dor
mant offices mean shrinking tax revenues
for cities which rely on them to fund public
services. Empty offices also put pressure
on transit systems. Reduced passenger
numbers are projected to leave a £1.5bn
hole in the finances of London’s transport
authority by 2024. New York’s Metropoli
tan Transportation Authority, which runs
the city’s subway, is forecasting a $1.4bn
deficit in 2025 as federal aid is phased out.
Business districts are taking defensive
measures. A common approach has been
to make them more vibrant, a trend that
was already under way before the pandem
ic. The City of London is proposing more
“allnight cultural celebrations”, traffic
free streets on weekends and at least 1,500
new apartments by 2030, while Canary
Wharf has added bars, restaurants and
pleasure boats to draw in younger crowds.
Singapore’s Urban Redevelopment Author
ity concedes it may need to rethink the mix
of buildings in the downtown district, in
addition to planning more cycle paths and
pedestrianised streets. In America, sky
scrapers are opening their doors to the
public, offering new observation decks
and Instagrammable art installations. Syd
ney has pedestrianised innercity streets
to use for al fresco dining. Paris, mean
while, plans to turn car parks in La Défense
into “lastmile” delivery hubs. As the
world of workevolves, places of work are
changing withit.nLet’s not go downtown
United States, office vacancy rates, %Source:MSCI141210862019 20 21Q3Q2Q1Q Q3Q2Q1QSuburbanSecondary business districtCentral business districtWhere the streets have no name—and not a lot of office workers either