The CRE Problem for Cities Isn’t Office, It’s Everything

When you have a lot of assets, modern portfolio theory — which creates portfolios to maximize return for a given risk — is the usual way of managing them. Cushman & Wakefield recently studied 15 U.S. cities. They found that much of the economic and real estate problems there is poor portfolio planning.

The report is called Reimagining Cities: Disrupting the Urban Doom Loop, created in collaboration with Places Platform. It points to the Covid-19 pandemic and the resulting fear of infection and rise of work-from-home that caused many urban doom loops. Decreasing foot traffic and falling occupancies led to tumbling asset valuations and reduced tax revenues — not just property taxes, but sales taxes that would have come from retail and entertainment businesses relying on traffic from offices.

The focus is on the 208 walkable urban places (called by the report WalkUPs) of the 15 cities. While these represent on average only 3% of a city’s land mass, they are 26% of the real estate valuation, 37% of city budget tax revenues, and 57% of the city’s gross domestic product.

The authors say that when they looked at these WalkUP districts, there were two types: downtown and other. The latter category included downtown-adjacent, urban commercial, and urban university. Next, the authors calculated a balance of use types: work (office, owner-occupied, GSA); live (for-sale and multifamily rental housing); and play (retail, hotel and other sports/entertainment).

Downtown districts averaged 15.9% living space, 69.7% work, and 14.5% play. For the other types, it was 41.8% living, 44.0% work, and 14.3% play. The authors argued that an “optimal” asset portfolio would be 31.0% living, 42.0% work, and 26.0% play.

They said the key strategies to “revitalize cities and downtowns to ensure they remain vibrant and engaging” include decreasing the proportion of real estate dedicated to work, especially in downtown areas; increasing the share of space for live, again especially in downtowns; boosting the percentage of housing that is for-sale versus multifamily; and enhancing the play real estate to increase foot traffic from visitors.

The results are interesting and yet potentially frustrating because for all the talk of a metropolitan area’s real estate portfolio, most is privately held, developed over time as a result of investors’ financial interests. The concept of a portfolio plan for a city is much harder than making mathematical decisions.

The study suggests that city governments could change the balance “by implementing policies such as expediting the entitlement process and offering incentives for adaptive reuse, particularly to encourage the conversion of over-supplied office space to Live and Play spaces.”

Those are possible tools, but probably not all that will be needed. There is no guarantee that adaptive reuse works with every building and the desired types of results.

Given the cost of housing ownership, increasing the percentage of that sold is not easy. For the most part, people renting likely won’t be able to buy. Is the concept to convert much of the former office space into condos or push more renters out of these areas?

Also, a study generated from the examination of 15 cities may not provide a template for all cities.