From Vacancy to Verdancy: Navigating the U.S. Commercial Real Estate Crisis and the Rise of Urban Farming Solutions

Welcome to our examination of the U.S. commercial real estate crisis and the innovative solutions that could rejuvenate the sector. We start by dissecting the causes and implications of the market's downturn, marked by rising vacancy rates and plummeting property values.

In this crisis, transforming vacant buildings into indoor vertical farms is a potential solution. Companies like Agriplay lead this transformation, turning empty spaces into productive urban farms. However, this innovative approach faces hurdles, such as high initial costs, complex engineering requirements, and restrictive zoning laws. Despite these challenges, the potential benefits offer hope for a more sustainable urban future.

Plummeting Values and Rising Vacancies: A Deep Dive into the U.S. Commercial Real Estate Crisis

The commercial real estate market in the United States has been experiencing a significant downturn since 2019, accelerated by online shopping and the surge of virtual offices. The retail apocalypse caused by digital commerce has left a swath of empty brick-and-mortar stores, and the pandemic-induced remote work trend has left office buildings deserted. These two factors have combined to create a perfect storm for commercial real estate, leading to a glut of new properties and a rapid decline in property values. With less demand for physical retail and office spaces, the market is witnessing a substantial decrease in both rental rates and property values.

To add to the market's woes, the Federal Reserve's approach to curbing inflation has seen interest rates reach new heights, further stunting the growth of the commercial real estate market. High-interest rates make borrowing more expensive, decreasing property values and making it harder for property owners to refinance their mortgages. Banks, already struggling under the weight of bankruptcies and a generally challenging economic environment, have tightened their lending policies. As per Goldman Sachs' estimates, new lending decreased by a staggering 40% in 2022, leading to an even more pronounced credit crunch in the real estate sector.

Alarmingly, Morgan Stanley has stated a looming $1.5 trillion in debt due in 2025 and forecasts a potential drop of 40% in the average price of commercial real estate. Such a drastic decrease in property values could push many property owners to default on their loans, further straining the banking sector. This grim situation is typified by Brookfield's decision to default rather than refinance their facilities due to anticipated weaker demand, signaling a potential wave of defaults across the sector.

CBRE's report that downtown office vacancy rates reached 18% in 2022, surpassing the peak of 13.4% during the 2008 financial crisis, further underscores the severity of the situation. San Francisco, a city once teeming with thriving businesses, has a staggering 80% office vacancy rate. In addition, in March 2023 alone, bank lending decreased by $104.7 billion, as reported by Bloomberg, causing a freeze in commercial property transactions. As these trends continue, the future of the commercial real estate market in the United States looks fraught with uncertainty and unprecedented challenges.

From Vacant to Vertical Farms: Challenges and Opportunities in Urban Agriculture Transformation

Repurposing vacant commercial real estate space into indoor vertical farms could offer a viable solution to the current real estate crisis while contributing to urban sustainability and food security. Indoor vertical farming, an agricultural method that maximizes production per square foot by growing crops in stacked layers, could potentially breathe new life into these unused spaces. Using advanced hydroponic and aeroponic systems, such farms can grow a wide range of crops, from leafy greens to herbs, year-round, regardless of external weather conditions. This could transform empty office buildings and retail spaces into productive, eco-friendly urban farms that bring fresh produce closer to consumers, reduce food transportation costs, and contribute to a city's resilience against potential food shortages.

Agriplay, a Calgary-based company, aims to transform underutilized commercial real estate into productive vertical farms using their versatile, modular technology. The company's president, Dan Houston, highlights the advantages of using commercial properties over industrial ones for vertical farming, including greater scalability and flexibility to meet market needs. In addition, the shift to remote work and the oil and gas market downturn has left much of Calgary's commercial real estate vacant, creating opportunities for Agriplay.

Investments in commercial real estate have been declining, which benefits Agriplay as landlords seek solutions to avoid leaving their properties vacant for extended periods. Houston says converting a property into a vertical farm can significantly increase its value. For instance, one property's value per square foot rose from CAD 49 to CAD 289 after being converted into a vertical farm.

Agriplay's innovation-to-inception lead time is notably short, allowing them to adapt and develop new technologies quickly. Their approach to repurposing real estate is similarly efficient. They can establish a new 470,000-square-foot growing facility within 24 months, with growing starting as soon as the first floor is ready. This flexibility, combined with incentives from the City of Calgary, helps reduce their capital expenditures (CAPEX) and reach profitability faster than traditional vertical farms.

However, there are significant challenges, particularly concerning initial costs, civil engineering requirements, and zoning laws. The cost of purchasing commercial real estate to establish vertical farms could be prohibitively high, serving as a significant barrier to entry. Despite falling prices in the commercial sector, these properties are still substantial investments, leading to high capital expenditure (CAPEX). Then there's the retrofitting of these spaces for agriculture, which involves considerable civil engineering. Buildings must be modified to accommodate the weight and moisture levels associated with farming, and suitable climate control systems must be installed. These renovations can be complex and costly, potentially offsetting the benefits of utilizing existing structures.

Zoning laws also pose a significant obstacle. Many urban areas have strict zoning laws that dictate what activities can occur in certain areas. However, many commercial properties are not currently zoned for agricultural use, and changing zoning designations can be a long and complex process, fraught with bureaucratic red tape. To facilitate this transition, city governments must consider revising zoning regulations to accommodate urban farming in commercial areas. Despite these challenges, the potential of turning vacant commercial real estate into indoor vertical farms could provide a win-win solution: revitalizing unused spaces while contributing to urban sustainability and local food production.

A recent article written by Jared Burden, a member of the law firm GreeneHurlocker published in AgFunder news, outlined how the zoning laws were restricting the development of vertical farms throughout the country as most of them were defined for a single use (residential, industrial…) thus making it impossible for most vertical farms to host their activities. Illustrating the complexity of the process, DGI Feeds plans to turn an empty Mitchell building into a 17,000 sq ft indoor farming facility for fodder. However, zoning laws don't permit indoor crop production, so the city council is considering an ordinance to allow it in specific districts. A conditional use permit would be required in central business districts.

While transforming vacant commercial real estate into vertical farms presents an innovative solution to the current crisis, it's important to note that it is not a panacea. Attempting to convert all vacant spaces into vertical farms could result in an overproduction of produce, leading to market saturation and waste. The scale of the commercial real estate crisis is so vast that an all-encompassing solution is unlikely. Instead, vertical farming should be considered one tool among many to repurpose these otherwise unutilized buildings. The key lies in diversifying the use of these spaces to meet various societal needs, whether it be urban agriculture, affordable housing, community centers, or creative spaces. A multi-pronged approach will breathe new life into these buildings and contribute to a more vibrant, resilient, and sustainable urban fabric.