Need an apartment? Have we got an office for you!

At the corner of LaSalle and Adams streets in downtown Chicago, the City National Bank and Trust Co. building rises like an elegant monument to the past. Its Doric columns, carved rosettes, and lion’s heads evoke the Classical Revival style popular a century ago. But it’s a deceptive facade.

The bank, whose name still adorns the front, disappeared in a merger 60 years ago. The building now houses two hotels, offices for professionals and a host of nonprofits, and a British men’s clothing store. And after a city competition to reimagine its financial district, the building will soon change again. The offices will give way to 280 residences – studios, one- and two-bedroom apartments, and amenities like a fitness center and even a private dog run.

It’s a small and lonely light in the real estate equivalent of a perfect storm.

With fewer workers going to the office, office vacancy rates stand at a 30-year high. Lease revenue is falling, especially in older buildings, and owners are seeing the value of their properties plunge. Since the pandemic, some $500 billion in value has already been wiped off the books, according to a study released this week.

Developers could upgrade their buildings or convert them to other uses, but in many cases the costs are prohibitive. And a slowing economy, rising interest rates, and tighter lending standards make those conversions even harder. Hanging over them is a cloud of uncertainty: Is the work-from-home movement a permanent change, or just a temporary post-pandemic phenomenon?

Despite this murky outlook, some cities are charging forward with conversion plans and subsidies. With fewer workers to keep their central business districts vibrant, these cities are hoping to replace them with apartment-dwellers and kick-start a transformation of their downtowns.

By helping developers convert offices to living units, the mayor of Washington, D.C., hopes to add 15,000 people to the 25,000 or so residents already living downtown. Pittsburgh has cobbled together some $6 million in state and federal funds for its downtown conversion program. Seattle last month put out a “call for ideas,” inviting building owners and architects to come up with new solutions for struggling office buildings.

Chicago is one of the leaders of the adaptive reuse movement. In March, the city selected the City National Bank building and two other nearby buildings for its LaSalle Street Reimagined project, which aims to revitalize the financial district. Last week, the city chose two more buildings for conversions, which will receive city help and subsidies. In all, the projects will mean more than 1,600 new downtown living apartments in what the city calls one of the largest office-to-residential conversions in the nation.

“It’s important for the resiliency of downtown,” says Cindy Chan Roubik, deputy commissioner of the city’s planning and development department. “It’s important to have people at different hours of the day and with different uses. You’ll have more people here on the weekends, after work hours, and that provides a vitality. That’s why we’re encouraging the mix of use and it’s really something that will benefit the central business district for years and years to come.” 

The logic for such conversions makes sense – to a point. Last year, the vacancy rate for the nation’s apartment buildings briefly fell to a record low of 2.4% before bouncing back a bit, while the office vacancy rate rose from a pre-pandemic low of 12.2% to above 17%, according to CBRE Group, the world’s largest commercial real estate services and investment firm, based in Dallas. Since the end of 2019, apartment rents have soared around the country while office leasing revenue has slumped by nearly a fifth after adjusting for inflation, according to researchers at New York and Columbia universities. 

Also, these averages mask considerable variation. Top-rated office space is holding its own, perhaps because companies want the best amenities to lure their workers back to the office. Less desirable and older office space is seeing much higher vacancy rates. And it is precisely these older, smaller office towers that make the best candidates for conversion to apartments. They’re typically easier to reconfigure to meet city codes, such as rules requiring every apartment to have windows. Then there’s the history and architecture, a big draw for some city-dwellers.

The problems are scale and cost. Even with their recent uptick, the rate of conversions is far too low to solve cities’ office vacancy problem, CBRE says. And the economics are problematic. In a report last month, Moody’s Analytics found that only 35 of the nearly 1,100 office buildings it tracks in the New York City metro area were suitable for conversion. The rest of the buildings are too expensive to make conversions viable, which means either government subsidies or a big drop in office values and rents would be needed.

Such a drop is precisely what has happened, according to the New York and Columbia researchers. In their analysis of the New York office market, they calculated that the actual value of the city’s office buildings had already fallen by 46% since the pandemic and would edge down to more than 50% by 2029 if the work-from-home trend persists. Those averages include top-rated office space; without that space in the calculation, the declines would be even worse.

Such projected losses spell trouble not only for developers but also for shaky regional banks that hold many of the loans on those buildings, as well as the cities that depend on commercial real estate for tax revenue. The researchers warn of a potential “urban doom spiral,” where reduced revenue would mean cities spend less on amenities, which could lead to a population exodus and even lower tax revenue. 

“We are just at the brink,” says Vrinda Mittal, a Ph.D. candidate at Columbia University’s business school and co-author of the study. “All this is yet to play out.”

At the same time, some of the cities are using their downtown revitalization plans to address another urban need: affordable housing. In Chicago, for example, the winning developers will have to offer 30% of their units at lower-than-market levels. But it’s an expensive way to create more affordable housing, and the reduced revenue makes downtown conversions harder. Affordable-housing advocates and many others are skeptical.

“The unit costs are so high,” says Dennis McClendon, a Chicago historian and geographer. For “half the cost, you could adapt and build the unit in a walk-up building in an outlying neighborhood.”

On the brighter side of the ledger, America’s cities have shown remarkable resilience and creativity in keeping up with the times. 

Central business districts have had “a series of crises and troubles over the last 100 years, whether it be the decline of factories, the rise of the suburban office park, suburbanization [generally], white flight,” says Aaron Shkuda, an urban historian at Princeton University and author of “The Lofts of SoHo,” a 2016 history on the residential conversion of the iconic New York neighborhood. 

“Cities like Chicago and New York have done quite well, reinventing themselves as command centers for the globalized, financialized economy,” he says. “Now, we’re kind of moving into another period where the city and its workers may have their [same] functions, but it’s just a question of how many workers literally need to go to the office every day.”