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Quick Hits: Today’s Top Stories

• Sen. Tim Scott of South Carolina formally announced Monday he is running for president. A prominent black Republican who spearheaded police reform talks after the murder of George Floyd and an experienced fundraiser with about $22 million already on hand for his campaign, Scott has nevertheless been polling in the single digits. He joins an increasingly crowded Republican primary field that includes former President Donald Trump and fellow South Carolinian, former Gov. Nikki Haley, among several others.
• President Joe Biden and House Speaker Kevin McCarthy concluded a meeting Monday without an agreement on raising the debt ceiling. McCarthy said they had a “productive” conversation, noting broad agreement on the need to reduce the deficit but major differences on the specifics of spending cuts and/or tax hikes to do so ahead of the June 1 deadline. 
• The Kremlin claimed Monday Russian forces were battling an incursion by “Ukrainian saboteurs” into Russian territory north of the eastern Ukrainian town of Kharkiv. Ukrainian intelligence officials, meanwhile, said the attackers—which some unconfirmed footage indicated had captured Russian armored vehicles—were fighting on behalf of Russian opposition groups unaffiliated with Kyiv. 
• Chinese authorities on Sunday ordered “critical national infrastructure operators” to stop using American tech company Micron Technology’s microchips in its computer systems, citing “serious network security risks” after a two-month investigation by Beijing’s technology watchdog. The move against Idaho-based Micron, the biggest United States-based producer of microchips, follows a U.S. ban on exports of advanced microchip technology late last year. The Commerce Department said China’s restrictions were without “basis in fact.”
• E. Jean Carroll, the writer who earlier this month won $5 million in damages in a civil case against former President Donald Trump, said Monday she is seeking additional funds for disparaging comments Trump made at a CNN town hall event the day after he was found liable for defamation and sexual abuse. During the town hall, Trump echoed his previous comments about Carroll, calling her allegations “fake” and saying she was a “wack job.” In a court filing, Carroll’s lawyers wrote she is seeking $10 million in damages as part of another lawsuit—originally filed in 2019—for comments Trump made while president. 
• Democratic Sen. Tom Carper of Delaware announced Monday he will not seek reelection for a fifth term in his solid blue seat in 2024. Carper said he would campaign for Rep. Lisa Blunt Rochester, a Democrat and Delaware’s only House representative, to replace him. 
• The Department of the Interior announced Monday that Arizona, California, and Nevada have agreed to draw less water from the Colorado River in exchange for payments from the federal government—an attempt to preserve the drought-stricken river’s water supply for cities like Phoenix and Los Angeles. The federal government will pay around $1.2 billion in Inflation Reduction Act funds to irrigation districts, cities, and Native American tribes for the water cuts, which are the equivalent of a 10 percent reduction in water use from the three states. The states have also agreed to an additional 3 percent usage decrease that is not tied to federal payments. 

It’s Tim Time

After months of reports that he would challenge Trump for the Republican presidential nomination—after the fundraising, the demure refusal to confirm or deny, the trips to key swing states—South Carolina Sen. Tim Scott officially announced his candidacy Monday. A devout Christian and longtime conservative with a made-for-politics backstory, Scott still faces a mighty steep climb out of single-digit polling to secure the nomination.

Declan is out of the office as we write this edition of TMD, so he can’t stop us from shamelessly commending to you his 2020 in-depth profile of Scott. But here’s the short version: Raised by a single mom, Scott hoped to attend college on a football scholarship before a car crash derailed his dreams. He became a Christian during college and sold insurance before working his way from local to national politics, defeating the son of segregationist Strom Thurmond for a House seat. Then-South Carolina Gov. Nikki Haley—now Scott’s opponent in the presidential race—appointed him to the Senate in 2013, and he won his latest reelection in November with a strong 63 percent of the vote.

More Office Space, More Problems

No one can say the captains of industry aren’t trying to keep the fluorescent lights on.

In January, Disney CEO Bob Iger deemed in-person interaction an essential ingredient for creativity and announced employees would be required to return to the office four days a week. Amazon CEO Andy Jassy cited similar reasoning as he ordered the company’s employees to report to the office three days a week starting this month. And Tesla CEO Elon Musk upped the rhetorical ante last week, declaring remote work a “morally wrong” excuse to phone it in.

But corporate giants’ efforts to get butts back in swivel chairs may not be enough to save the sad office salad. Remote work has persisted beyond COVID-19 precautions with no signs of fully bouncing back. The trend threatens commercial real estate business models and has city leaders brainstorming what’s next for their downtowns.

This year has been disappointing for building owners hoping it would mark a return to pre-pandemic office occupancy levels. Exact figures vary, but some companies estimate national office vacancy rates are near 20 percent, and the numbers keep hitting record highs. Even CoStar Group’s relatively sanguine estimate of around 13 percent vacancy is worse than at the peak of the 2008 financial crisis. 

Numbers are particularly bleak in superstar cities. Brokerage firm JLL reported a 16 percent vacancy rate in Manhattan in the first quarter of 2023, and the empty square footage could fill some 26 Empire State Buildings. On the West Coast, commercial real estate firm CBRE reports 30 percent vacancy in San Francisco—up from just 3 percent in 2019. Just 10 percent of office buildings account for more than 80 percent of occupancy loss by square footage between the beginning of 2020 and the end of 2022, according to a CBRE analysis. These “hardest-hit buildings” are disproportionately located in the downtown areas of coastal cities. 

The Federal Reserve’s rate hikes put extra pressure on the sector, as commercial real estate loans get renewed at higher interest rates. “More than 50 percent of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points,” Lisa Shalett, chief investment officer for Morgan Stanley, said last month. With so much vacant space exerting downward rent price pressures, building owners may struggle to make up for these higher loan costs with higher rents.

And when buildings sit empty, the financial fallout extends to the constellation of downtown lunch places, dry cleaners, watercooler delivery services, and public transportation networks set up to serve office workers. Even a mostly in-person workweek can pinch restaurants and bars—hybrid workers often stay home on Fridays, drying up the stream of customers fleeing from office blocks to downtown bars to ring in the weekend.

Still, there are some reasons for optimism for building and local business owners. For one, a 20 percent vacancy rate also means an 80 percent occupancy rate—office work may never return to pre-pandemic levels, but the nation’s downtowns have far from emptied out. For another, even the deepest office space woes don’t necessarily spell doom for the rest of commercial real estate. “Industrial real estate, multifamily or apartment real estate, retail real estate, [and] hotels are all doing reasonably well,” Richard Barkham, global chief economist at CBRE, told TMD. 

And the financial pressures of office building vacancies are a steady drip rather than a deadly cliff, giving owners and cities more time to respond. “Leases are staggered, they don’t all roll over at once,” Ajay Rajadhyaksha, global chairman of research for Barclays, said last month. “It is a problem, don’t get me wrong, office vacancy rates are very high. There’s a lot of office space available, but it’s something that’s going to play out over a long period of time, not all at once.” 

Barkham agreed, emphasizing that even a broad economic downturn this year—perhaps brought on by the Fed’s rate hikes—doesn’t guarantee a 2008-style meltdown for the commercial real estate market. “Even if there is a relatively sluggish recovery in 2024, that doesn’t give us enough stress to cause a broad-based collapse in real estate values feeding into the banking sector [and] a great financial crisis sort of situation,” he said.

Still, this is all cold comfort for urban centers staring down significant short- and medium-term revenue losses—and long-term problems if they can’t adjust to the realities of the new office market. In San Francisco, for instance, the near-30 percent vacancy rate—and a resulting drop in property values—has cratered property tax revenue, putting a hole in the city’s budget. San Francisco spends about $14 billion a year, but officials expect to cut the budget by about $250 million this year and $500 million next year.

Major cities must adapt if they want to keep their edge. “New York will need to recognize that the office market, especially its lower end, is likely to face years of vacancies,” argued Harvard University economist Edward Glaeser and Carlo Ratti, director of the Senseable City Lab at Massachusetts Institute of Technology. “The city’s future depends on being able to attract and empower new residents—the creative class and everyone else—who might be tempted to settle down in other cities that are more affordable and convenient.”

New York’s leaders are trying to meet the moment. NYC Mayor Eric Adams began his term with an order for city employees to return to office five days a week but has recently suggested he may walk it back after facing difficulty recruiting employees. Meanwhile, Adams and New York Gov. Kathy Hochul released a comprehensive plan in December which included a goal of transforming NYC commercial districts into “vibrant 24/7 destinations.” Steps toward that end included improving public green spaces and making it easier to rezone buildings for new uses.

One popular idea for unused office space is converting it into housing, but that’s not as simple as ripping up the cubicles. Offices tend to be wider and deeper than residential buildings with proportionately fewer windows per floor, so dividing them into apartment units is a tricky geometry problem. Residential buildings also require different kitchen, bathroom, and elevator configurations—and all these changes are costly. Lower Manhattan’s 25 Water Street—the former office of the Daily News and other companies—was bought for $250 million but could cost more than double that to turn into housing. In some cases, it’s cheaper to demolish and start fresh than convert.

All this takes time. “Converting the land use, if not the building, out of office into residential and working on neighborhood creation—that doesn’t happen overnight,” Barkham told TMD. “That’s a 10-year program. But the sooner cities get on with it and show themselves creative and active in doing that, the quicker they’ll reduce the stock of redundant space and get their tax base back.”

Worth Your Time

• What can we learn from a man who lived to be 109? Not the secret to his longevity, but the tools to live a good life, however long we have, writes David Von Drehle for the Washington Post in a piece about his neighbor, Charlie White. “Life seemed somehow to rest more lightly on him than on most of us,” Von Drehle writes. “I came to realize Charlie was not a survivor. He was a thriver. He did not just live. He lived joyfully. Charlie and the future grew up together. With one foot planted in the age of draft animals and diphtheria—when only 6 percent of Americans graduated from high school, and even middle-class people lived without electricity or running water—Charlie planted the other foot in the age of space stations and robotic surgery. In the end, Charlie defied the actuaries to become one of the last men standing—one of only five fellows from the original 100,000 expected to make it to 109. By the time he was done, he had lived nearly half the history of the United States. Charlie lived so long that the veil of complexity fell away and he saw that life is not so hard as we tend to make it. Or rather: No matter how hard life might be, the way we ought to live becomes a distillate of a few words.” 

Presented Without Comment  

Insider: The stock market briefly dipped after a seemingly AI-generated hoax photo of an explosion near the Pentagon went viral.

Toeing the Company Line

• In the newsletters: Nick charts a path (🔒) to a Sen. Scott victory, Kevin traces (🔒) the cultural origins of Robert Kennedy Jr.’s presidential bid, and as noted above, the Dispatch Politics crew, plus Mike, dive into the emerging GOP primary dynamics. 
• On the podcasts: On the latest Advisory Opinions, Sarah and David discuss the latter’s recent trip to Ukraine and dive into the Andy Warhol copyright skirmish. 
• On the site: Mike reports from North Charleston on Scott’s campaign launch and Price explains the Biden administration’s plan for regulating artificial intelligence.

Let Us Know

Have you noticed empty office buildings being repurposed in your town or city?