Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / How Falling Birth Rates Reshape the Commercial Real Estate Market
Transcript
- Lucas: So there's this building in downtown Cleveland. It's a 1980s office tower, twenty-two stories, about three hundred thousand square feet. By 2024 it was sitting at forty percent occupancy. The owners decided not to try leasing it out as office space again. Luna: What else are you going to do with a half-empty office tower in a city where the metro population has been flat for a decade? Lucas: Exactly. They're converting it into two hundred apartments. Studios, one-bedrooms, some two-bedrooms. The whole project should wrap up by the end of next year. And this isn't an isolated case — it's part of a broader shift tied directly to falling birth rates and smaller households. Luna: How direct is the link, though? Office vacancies were driven by remote work, not demographics. Lucas: Remote work is the immediate trigger, but demographics are the structural force underneath. Consider this: the average household size in the U.S. has fallen from 2.6 people in 2010 to about 2.4 today. That doesn't sound like much, but it means millions of additional households forming — often single people living alone — each needing a separate dwelling. Luna: Right, so more demand for residential units, but less demand for the office space where those people used to work. You've got a mismatch in the built environment. Lucas: Exactly. And that's where adaptive reuse comes in. A 2025 report from JLL found that adaptive reuse projects in the U.S. increased by thirty-four percent year-over-year. The report specifically cited demographic shifts — fewer young workers entering the labor force, more retirees — as a key driver. Luna: But converting an office building into apartments isn't cheap. You're talking about gutting the interior, adding plumbing for kitchens and bathrooms, dealing with floor plates that are too deep for natural light. Who's financing these projects? Lucas: A lot of it is institutional capital — pension funds, insurance companies — that sees long-term value in repurposing assets. The Cleveland project I mentioned is backed by a regional bank and some local tax incentives. But you're right, the economics only work in certain markets where the purchase price is low enough. Luna: And where zoning allows it. Many cities still have separate zoning for commercial and residential. You need a variance or a full rezoning. Lucas: That's a huge barrier. But some cities are starting to pre-emptively rezone downtown areas. Minneapolis, for example, eliminated single-family zoning in 2019, but more to the point, they've been approving office to residential conversions without as much red tape. Luna: Let's go back to the demographic side for a second. The fertility rate in the U.S. hit a record low of about 1.6 births per woman in 2025. That means fewer people entering the workforce in the 2030s. How does that affect commercial real estate beyond offices? Lucas: It affects retail, for sure. Fewer young families means less demand for children's clothing stores, toy shops, family restaurants. We've seen that in previous episodes. But there's a flip side: more demand for senior housing, medical offices, and services for older adults. Luna: So we might see a rotation within commercial real estate — less office and retail, more healthcare and assisted living. Lucas: Exactly. And that rotation has already begun. According to a 2026 report from CBRE, medical office building construction has grown at a compound annual growth rate of about six percent over the past five years, while traditional office construction has declined. That's partly demographic. Luna: You know, it's funny — we're sitting here talking about this, and I think a lot of listeners might feel like the economy is this abstract machine. But when you look at a single building being converted from offices to apartments because of how many kids people are having, it becomes very concrete. Lucas: That's exactly why we do this show. If walking through the economy with us has made something click for you, we'd love it if you'd support the work. We deliberately don't run ads on these episodes. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep this completely independent. And we really appreciate everyone who does. Lucas: So back to that Cleveland tower. The conversion is expected to cost about forty million dollars, or two hundred thousand per unit. That's actually on the low end for new construction in that market, where a new apartment building might run three hundred thousand per unit or more. Luna: So the economics can work if you're buying the building at a distressed price. But not every office building is a good candidate. What about the ones that can't be converted? Lucas: Those are the tough ones. Some will be demolished. Others might sit vacant for years, becoming blighted. That's a real risk for downtowns that were built around a nine-to-five office culture. And with fewer young workers moving to cities — partly because they're a smaller cohort, partly because remote work lets them live elsewhere — some downtowns may never fully recover. Luna: But isn't there also an opportunity? If you convert office space to residential, you bring people back downtown, which could support retail and restaurants again. Lucas: That's the hope. And there's some evidence it works. In Pittsburgh, the conversion of the former Gulf Tower into apartments has helped revitalize that block. But the scale of conversions needed is enormous. A 2025 study from the National Bureau of Economic Research estimated that about twenty percent of U.S. office space is functionally obsolete and unlikely to ever be re-leased at pre-pandemic rates. Luna: That's a lot of square footage. And with fewer people entering the workforce, the demand for new office space isn't coming back anytime soon. Lucas: Right. The Bureau of Labor Statistics projects that the labor force will grow at just 0.3 percent annually over the next decade, down from 0.5 percent in the 2010s. That's a direct consequence of the birth rate decline. Fewer workers mean less demand for office space, whether that's in person or remote. Luna: So the commercial real estate market is facing a kind of demographic headwind that it hasn't really had to deal with before. Historically, you could count on population growth to fill space. Lucas: Exactly. And it's not just offices. Think about industrial real estate — warehouses and distribution centers. The growth in e-commerce drove demand for those, but with a smaller labor force, you might see more automation in warehouses, which could reduce the need for space per worker. It's complicated. Luna: What about the financing side? Banks have a lot of exposure to commercial real estate loans. If a big chunk of office space becomes worthless, that could cause credit problems. Lucas: The Federal Reserve has been monitoring this. In its May 2026 Financial Stability Report, it noted that about one hundred fifty billion dollars in commercial real estate loans are set to mature this year, and many of those properties have lost value. Banks are tightening lending standards, which makes it harder to finance conversions. Luna: So you've got this kind of gridlock: owners can't sell because they'd take a loss, banks don't want to foreclose, and conversion is expensive. Meanwhile, demographics are shifting the ground beneath everyone. Lucas: That's the picture. And it's not going to resolve quickly. But I think the most interesting question is whether cities will adapt. If they streamline zoning and offer incentives, adaptive reuse could become a major source of housing supply, which would help with affordability. If they don't, a lot of downtowns could become hollowed out. Luna: And that's the real demographic story, isn't it? It's not just about how many babies are born — it's about how the built environment changes in response. Lucas: Yeah. And we're only in the early innings of that change.