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Increasing Downtown Activity Points to Market Revival

CBRE global chief economist Richard Barkham said he is convinced a revival is underway in the commercial real estate market and that now is the time for developers and investors to seize the opportunity.

In an article published in CBRE’s Our Take newsletter, Barkham said his travels throughout 2024 revealed a number of positive indicators that support his prediction for 2025. The country is showing signs of recovery as we approach the five-year anniversary of the onset of the pandemic, he said.

People are moving back to downtown areas in US cities following a rapid slump in downtown activity caused by the pandemic, and that is evident in the food and beverage scene. Since 2021, roughly 1.1 million business applications have been filed and more than 160,000 new businesses have been created in the food service and accommodation sector, a large percentage of which are in downtown and urban locations.

“Cities provide easy opportunities for gathering, and in that respect, restaurants have really caught my eye,” Barkham said. “Wherever you look there’s a new restaurant, which is often full, and heaven help you if you want a reservation on a popular night.”

Another positive indicator is the demand for apartments, with strong net absorption over the past six quarters in urban and suburban locations. Downtown areas also have produced growth in occupied stock, said Barkham. In addition, America’s downtown streets are coming back to life. He pointed to Placer.ai data that indicates 25 of America’s top 30 cities have pedestrian flows above pre-pandemic levels.

Activity in the troubled office sector is even taking a turn, with gross leasing over the past few quarters bettering its long-run trend of 50 million square feet per quarter. While overall office vacancy is hovering around 20%, the best prime-grade offices have vacancy closer to 15% and dropping, he said.

In addition, office conversions are gaining momentum, with 179 conversions planned this year, up from 103 in 2024 and 63 in 2023.

Barkham said it could take 18 years to transition obsolete office space into new uses.

“As a point of reference, after the loss of manufacturing activity in the 1960s, it took until the 1980s for American cities to bounce back, driven by the rapidly expanding financial services sector,” Barkham said. “Ultimately, the urban transition is necessarily unpredictable and needs to be market-led, in whatever direction that goes.”

Flexibility in land-use planning and tax relief or subsidies to accelerate demolition or conversion of obsolete stock could accelerate the 18-year timeline.

“Developers and investors have a generational opportunity to lock in high returns — capitalizing on America’s gross shortage of housing and the long-term demand for city living,” said Barkham. “Whether you’re an investor or developer looking for opportunity, or a business considering how to grow or evolve your operations in a major city, if you’re not already actively planning for what’s next, you may miss the moment.”

Reprinted with permission from the Wednesday, 22 January 2025 07:07:14 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.