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Downtown Madison bouncing back from the pandemic, but office vacancy a concern

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Downtown Madison

Downtown Madison Inc.'s annual report for 2022 says the central core is recovering from the COVID-19 pandemic in many ways. But the report also offers concerning data on office vacancies and a decrease in employees working there.

Downtown Madison continues to evolve and recover after the COVID-19 pandemic, with the central city even flourishing in many ways, but some concerning signs persist such as a rising office vacancy rate and a decrease in employees, a new report says.

The central Downtown, an area bounded by lakes Mendota and Monona, Blair Street and South Park Street, is experiencing new construction of housing and hotels, adding residents, and increasing attendance for events and tourism, Downtown Madison Inc.'s 48-page annual report for 2022 says.

"After several very difficult years, Downtown Madison is growing in activity, vibrancy and life," DMI president Jason Ilstrup said. 

But there are concerns.

"There are several concerning data points in the report including the rising office vacancy rate from 10.9% in 2021 to 13.4% in 2022, and the decrease in employees working Downtown from 50,627 in 2020 to 49,118 in 2022," Ilstrup said. "Downtown Madison needs thousands of workers, working at a variety of jobs at all hours of the day, to add vibrancy and economic stability."

But the return to offices since the pandemic is changing downtowns nationwide, Ilstrup said.

"Even though Madison is losing employees Downtown and the office vacancy rates are rising, we are faring much better than many similar downtowns, including Des Moines, Boulder, Portland, Austin and Milwaukee," he said.

"There is reason to be hopeful, to be confident. We have an elastic Downtown," said Zach Brandon, president of the Greater Madison Chamber of Commerce. "That said, there's work to be done."

Building boom

The Downtown saw $54.1 million in new construction in 2021, compared to $20.1 million in 2020 and $19.6 million in 2019. And it saw $35.5 million in the first few months of 2022, the report says. That pace could equal or surpass the five-year high of $75 million in 2018. So far, it looks like 2023 could be even more promising, Ilstrup said.

"With 641 units approved in 2021, and thousands more approved in 2022, Downtown is seeing a surge in new rental housing," Ilstrup said.

But a lack of housing overall Downtown is very concerning, Ilstrup said. "With Downtown rental vacancy rates already dropping, from 5.89% in 2020 to 5.28% in 2021, and knowledge of an even tighter market in 2022, the lack of housing and affordable housing could significantly slow down Downtown’s economic growth," he said.

Further, "the downtown housing market is adding thousands of new apartments but little to no new home ownership opportunities," he said. "Only a handful of condos are being built today. Downtown Madison needs a better mix of both apartment and ownership opportunities to ensure everyone has an option to live Downtown."

Housing construction is encouraging but it's not enough, Brandon said. "We're so far behind," he said. "There's so many units needed each year. We don't want Downtown to be only a place for the affluent. We need a robust mix of housing."

Demographics

Meanwhile, Downtown's demographic profile is evolving.

The percentage of white residents living Downtown fell from 85.8% in 2000 to 73.3% in 2022, while Black residents dropped from 4.3% to 3.4%, Asian residents rose from 6.1% to 13.8%, Hispanic residents increased from 3.7% to 6.4%, and those of two or more races jumped from 3.4% to 9%, the report says.

All of those changes generally reflected citywide trends, except for Black residents, which rose from 5.8% to 7.3% in that time.

"More and more people from all races and ethnicities are moving Downtown," Ilstrup said, adding that UW-Madison is becoming more diverse and more people are feeling a sense of belonging Downtown. "Over the last several years, significant work has occurred to make Downtown Madison a place for everyone. However, there is still significant work to be done to ensure everyone belongs."

Crime update

At the same time, Downtown is becoming safer, the report says.

Criminal offenses including battery, simple assault, burglary, thefts from buildings and vehicles, other larceny, damage to property, drug violations, disorderly conduct and trespassing dropped from 3,167 in 2019 to 2,831 in 2020 to 2,569 in 2021, the report says.

"Criminal offenses committed Downtown are down significantly, with the total number of crimes at a 10-year low," Ilstrup said, adding that shots fired incidents also are down. "Downtown is a safe place to live, work and play."

Office vacancies

The Downtown office market, however, is shifting.

Class A office space has a 9.6% vacancy rate, Class B a 15% rate and Class C a 26% rate in 2022, the report says. Overall, Downtown has a 13.4% vacancy rate in 2022, up 2.5% from last year.

"The increasing office vacancy rate is certainly concerning," Ilstrup said. "Successful Downtowns need office workers. However, thanks to decisions made by city leaders over the last few decades, Downtown Madison is a truly multi-use use environment not dependent only on office workers for vibrancy."

The number of Downtown businesses decreased from 1,992 in 2020 to 1,984 in 2022, while Downtown employees fell from 50,627 in 2020 to 49,188 in 2022. The number of businesses and employees citywide and in Dane County increased during that time span.

"We are seeing less of the larger tenants coming in and more smaller tenants," Ilstrup said. "We're seeing companies with smaller footprints.

"DMI will continue to work hard to attract existing employees and new employers back Downtown," he said. "We need to create strong magnets, like attractions, restaurants and other amenities, to ensure Downtown Madison is the place everyone wants to work. We need to create magnets."

National design heavyweights want to help reimagine Lake Monona waterfront

Downtown retail and restaurant spaces still have higher vacancy rates than earlier in the pandemic, but real estate leaders say there's more interest now than ever in entrepreneurial ownership, especially pop-up shops and restaurants, the report says.

Foot traffic

Pedestrian counts on State and King streets continue to trend upward with more than 55,000 pedestrians daily and more than 1.5 million people monthly, a 104% rise from 2021, it says.

Tourists and visitors are also returning Downtown, but the activity is still below pre-pandemic levels, the report says. Visitor-related local and state tax revenue totaled $21.1 million in 2021, a 38% increase over 2020, and visitor spending topped $187.6 million in 2021, a 63% jump over the previous year, the report says. The sum, however, is still far below the $303.7 million spent in 2019.

The community, Brandon said, must tend to dynamics highlighted in the report, especially the need for housing and the trend of more people working remotely. 

"If the workforce continues to work remotely, it makes the Downtown less elastic," he said, explaining retail and restaurants want to be where people are. "It's an ecosystem. We have to take a long term look at this stuff."

"There is reason to be hopeful, to be confident. We have an elastic Downtown."

Zach Brandon, president of the Greater Madison Chamber of Commerce

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