City leaders are trying to figure out what the future looks like for their downtowns full of half-empty office buildings. Here in the middle of 2023, the speed of the return-to-office movement is somewhere between a trickle and a stall.
But office isn't a dead asset class - the question is what kind of office product will thrive in the future, and what to do with the buildings that don't make the cut. I've got a vision of how this will play out, inspired by the shift in the movie theater business over the past few decades.
Movie theaters are a type of real estate that has been forced to evolve and improve its offerings as technology has made it easier and better to watch movies at home. Sound familiar? Nowadays, many consumers have 70-inch high-definition televisions with surround sound, comfortable couches and the ability to watch thousands of films on multiple streaming services. It's remarkable that anyone bothers to pay the ever-escalating price to watch a film at a movie theater. But they do. In the first quarter of 2023, the domestic box office tally is tracking just 25% below 2019 levels, an improvement over last year, which would work out to $8.5 billion in ticket revenue this year should the pace be sustained.
Because the viewing options at home for consumers continue to improve, theaters have changed to offer an experience that can't be had in the typical family room. IMAX Corp. - operators of theaters with super-sized screens and super-sized ticket prices - saw its revenues in this year's first quarter exceed the same period in 2019, for instance. Nobody has a house big enough for a screen that measures 59 by 79 feet. IMAX is growing while older theaters that can't keep pace on the amenities front are in decline.
Based on the evidence we have, that's a reasonable way of thinking about the state of offices now and what's likely to work in the future. The Related Companies, developers of projects like Hudson Yards in New York City, recently put out a presentation on the future of the office where they coined the phrase "lifestyle office" to describe the model that's currently thriving and has the brightest future.
Lifestyle office, as they see it, is essentially the IMAX version of an office building, packed with amenities including beautiful design, unique experiences, world-class shopping and culture, and plenty of greenspace. Related Companies says its lifestyle office vision represents less than 5% of the market and has significant rent premiums and lower vacancy rates compared with the rest of the market.
For the somewhat hollowed-out office centers in high-cost cities like New York and San Francisco, this strikes me as where we're headed. These are the neighborhoods with the wealth that can afford the construction and operating costs needed to build a lifestyle office, and with the high-powered employers in tech and finance that will pay the stratospheric rents needed to make the projects viable. The $1 billion renovation of the Transamerica Pyramid in San Francisco is a sign that developers are putting money behind this bet.
Everywhere else, where budgets are more of a factor and office rents north of $100 a square foot aren't feasible, it's a bit more complicated. In some cases, improving amenities enough to become a discount version of a lifestyle office might be enough to stabilize an office district, similar to non-IMAX theaters that offer plush, reclining chairs and upgraded food options.
But when that isn't enough, the question becomes how to repurpose a building. Residential conversions are great, but they're often difficult because of the difference in floor-plate layouts between modern office and apartment buildings. Public money and streamlined permitting to assist in the redevelopment of antiquated buildings is going to be essential in some places, which is what city officials in Calgary, Canada, determined after an oil bust-related office market downturn in 2014.
Since cities and office building owners will be reluctant to admit defeat, what they should do for now is watch this lifestyle office trend and think about how they can tweak it to suit their needs based on the wealth and employer base of their market. Just like we've seen with movie theaters, we'll still have a thriving office market in the future, but it's going to be smaller and more expensive to operate - though ultimately a better experience for customers.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.