Cities Forced to Consider Reuse of Empty Commercial Real Estate As More Employees Work From Home

According to local commercial real estate professionals, a huge topic of discussion right now is how to repurpose the current supply of office space, which may not have a solution any time soon due to bureaucratic red tape.

As more and more companies allow employees to work totally remotely, in-office part time or some combination of the two, office space owners will soon have to repurpose their buildings into either residential or mixed-use in order to remain profitable, or be forced to sell their properties. The problem they say is rezoning those properties, which can take a long time as it means possible updates and changes to Pasadena’s Central District Plan.

This is not an isolated problem, as many cities around the country, indeed, the world, are experiencing similar problems.

“We’re seeing particularly on North Lake [Avenue] and other parts of the city, 25 to 30% or more vacancy rates,” said local  attorney Richard Mcdonald. “We’re starting to see sort of a systematic shift with how much people can telecommute, which is impacting rental rates and vacancy rates. In other words, some firms are coming back, but they’re only coming back, say, three days a week and not five days a week. Don’t really see anybody other than maybe the banks saying, ‘Hey, get back in here.’”

According to Propertyshark, a real estate website, there are 423 commercial spaces available in Pasadena. The average office space rents at $3.04 per square foot, according to Digsy, a commercial real estate website.

According to The New York Times, 14% of office space in midtown New York is vacant — the highest since 2009, leaving some to deem the vacancies the office-pocalypse.

“Our best estimate is that 25-30% of the workforce will be working-from-home multiple days a week by the end of 2021,” said Kate Lister, president of Global Workplace Analytics in a prepared statement.

According to CNBC, last July, after ShipBob decided to let staffers work from home, the company built a wall in the middle of its Chicago headquarters so half the space could be rented out to another company.

“Pasadena has had a long history of supporting mixed-use zoning, particularly in the Central District, where mixed- use has been allowed in the majority of neighborhoods, such as the Civic Center, Playhouse District, and Walnut corridor since 2004,” said city Planning Director David Reyes. 

“When the City Council adopted the latest General Plan in 2015, mixed-use was a major component of the vision for the future of Pasadena, focusing on areas near transit stations, Specific Plan areas, and key commercial corridors while preserving single-family and low-scale multi-family neighborhoods.

“As we update the Specific Plans to reflect the General Plan vision, mixed-use zoning will be expanded to more areas outside of the Central District where it’s not allowed today,” Reyes said.

Reyes said there has been one exception in the Central District. A portion of Lake Avenue between the Foothill (210) Freeway and Green Street, where the General Plan prohibits housing in order to preserve the established office uses to support corporate tenants and jobs.

“However, due to a combination of factors, including the need for more affordable housing, decline in commercial office demand, and feedback we’ve received from the community as part of our outreach efforts, the staff is considering recommending changes that would allow the adaptive re-use of office buildings to allow housing as part of the Central District Specific Plan update,” Reye said. 

“A study session with the Planning Commission is anticipated in November to have further discussions and receive further input from the community on this approach,” Reyes said. 

According to local realtor Bill Ukropina, building owners are going to have to lower their rates, find other tenants to expand into the space that they are not leasing due to downsizing, or find reuse for the buildings, like residential or hotel, but still there will be complications and costs associated with the renovation.

“They’re going to have to do an analysis on if you converted the office space into apartments or condos and what would the cost be, what you could rent it or sell it for,” Ukrropina said. “And is that better economics than lowering the rate to attract office tenants? Plus, parking revenue is significantly down because people aren’t driving to work every day and they’re sharing parking passes.”