Fifty-eight percent: That’s the share of American workers that have the opportunity to work from home at least one day per week, according to a study published this past summer by consulting firm McKinsey & Company. That figure goes against an early-pandemic assumption that Americans would head back to the office once vaccinations for COVID-19 came online. Thirty-two months later, remote work options remain massively popular. It’s a trend that is readily apparent in downtown Traverse City, where nearly every building has office vacancies, where one of northern Michigan’s biggest employers has left behind a core workspace, and where huge chunks of prime office space are available for lease. Will downtown office occupancy bounce back? Or will property owners see fit to convert downtown office spaces into other uses? The Ticker takes a closer look.

Jean Derenzy, CEO of the Traverse City Downtown Development Authority (DDA), has spoken in the past about the extent to which downtown restaurants and retailers rely on the traffic from office workers. For years, much of that traffic was driven by the local employer with arguably the biggest downtown presence: Hagerty. In addition to the company’s sprawling headquarters at 121 Rivers Edge Drive, Hagerty also occupied several floors of office space in the Chase Bank building at 250 East Front Street. But much of Hagerty's office space has been empty or lightly used since the start of the pandemic as the business implemented – and then kept in place – a remote work policy.

In a market assessment prepared for the TC Downtown Development Authority (DDA) in September, consulting firm Progressive Urban Management Associates stated that downtown “remains heavily reliant on Hagerty” to drive economic activity, and that the DDA needs to find “additional anchor employers in growth industries” to bring more workers back downtown.

Hagerty, meanwhile, has made it clear that it is in no hurry to mount a full-scale return to the office. Earlier this year, the company vacated its space at 250 East Front Street, leaving 7,500 square feet of prime downtown office suites available for sublease. The listing, by Kevin Endres of the commercial real estate firm Three West LLC, notes that Hagerty’s lease of the space runs through December 31, 2029.

Could Hagerty eventually reclaim its offices in the Chase building and restore the presence of its workers downtown? In a written statement prepared for The Ticker, Hagerty says it remains committed “to Traverse City as our headquarters” but also to the “Remote First work model” it adopted during the pandemic. Remote First, Hagerty states, “helps us recruit talent that previously would not have been able to join us.”

“The Remote First model offers our employees the flexibility to choose when to utilize our office space or work from home based on their individual work requirements,” Hagerty’s statement continues. “This change reflects the preferences of our employees, who overwhelmingly prefer working remotely. Team members are supported remotely through technology, processes, programs, and coaching to perform at their best.”

Hagerty de-emphasizing its in-the-office footprint is part of a trend in downtown office space. While some businesses have gotten back to pre-pandemic normal, Marty Stevenson – a commercial realtor with EXIT Realty Paramount – says downtown office vacancies are notably high.

“People aren’t flocking back to the downtown office spaces,” Stevenson tells The Ticker. “We have a good amount of downtown that is now vacant, with Hagerty leading the way.”

“There is still a lot of vacant space,” concurs Dan Stiebel of Coldwell Banker Commercial Schmidt Realtors. “We're starting to see more activity and more people take some of the larger offices. But there's still this large amount of space available, and I think some of it will end up getting redeveloped and probably turned into residential. We have too much office and not enough residential, and there's really no reason that a lot of the downtown office buildings couldn't convert to residential, other than that the economics have to work.”

Stevenson doesn’t expect to see a lot of conversions of downtown office space, specifically because of the economics. Even with lots of vacancies, he notes that downtown office space remains at a premium price, which means buying an office and renovating it into a residential use might be a riskier investment than most owners or buyers want to take. “You’d either be spending money to convert to residential and then trying to recoup that money on a sale, or you’d be trying to sell an office at top dollar to someone to convert it to residential,” Stevenson says. “And then that person would be fighting against that dollar price [to recoup their investment].”

One thing Stevenson and Stiebel agree on is the growing demand for smaller office spaces. While Stiebel says he’s currently working on a few larger leases – including a 12,000-square-foot space for a “large company that’s combining a number of different offices into one location” – most of the interest around offices right now is for smaller spaces. “There’s a lot of people who want to get out of the house and want something small,” Stiebel explains.

According to Stevenson, one major effect of the growing demand for smaller offices is that sellers are becoming more flexible with how they list vacant offices for lease. “So, maybe you're offering a 6,000-square-foot office, but you're also offering it in 2,000-square-foot chunks,” he says.

Case-in-point for that segmented-out approach? The sublease listing for the former Hagerty space at 250 East Front, which states that the suites “can be leased individually, or together.” Stiebel also notes that he and a client are about to try a similar strategy to fill vacant office space in the 101 North Park building. The space in question, which spans half the floor previously occupied by 20Fathoms – and now occupied in part by The Children’s House – includes 14 individual offices. Until now, all that space has been listed as one office lease. “Now, we’re going to be putting those on the market as single office spaces,” Stiebel says.

What does all of this mean for the future of downtown office space? For his part. Stiebel is still optimistic that office real estate will eventually bounce back to pre-pandemic norms.

“Long term, I still think the office market is coming back,” he says. “I never thought it would be quick. But what's going to happen is, in 3-5 years, someone's going to do a study that shows that workers who are working in the office in collaboration with other workers are more productive than workers who are working from home. And when that happens, a lot of larger companies are going to want to bring their employees back into the office to be competitive. When everybody's efficient and knows what they're doing and then goes home, it's easy to keep doing it. But to innovate and come up with new ideas, or to train new people, those things are really hard to do remotely. And as time goes on, the need to get back together becomes greater. It might be not five days a week in the office, it might be three. But there's going to be a need for office space.”