Report Predicts Remote Work Trends Will Cause Steep CRE Losses, Problems For Cities
The coronavirus pandemic created a work-from-home revolution that may lead to a decline in tax revenues from commercial properties, and cities will suffer as they cannot provide important services to residents, a new report warns.
If current trends persist, demand for commercial real estate space could drop by 12% to 25% in key cities, leading to a correlated drop in assessed values, and thus in city property tax revenue. The full effects haven’t yet been felt because federal funding from the American Rescue Plan has so far cushioned the blow, but city leaders should prepare.
That’s the takeaway from a new report titled “Impact of Work From Home on Commercial Property Values and the Property Tax in U.S. Cities,” commissioned by the Communications Workers of America.
The report was authored by researchers from the City University of New York and the University of Illinois at Chicago and released Thursday by the Institute on Taxation and Economic Policy.
“Though magnitudes vary somewhat across cities, all face significant fiscal risks,” the report says.
Researchers focused on eight cities — Atlanta, Austin, Charlotte, Chicago, Los Angeles, Miami, New York and San Francisco — where commercial real estate accounts for an average of 37% of property taxes, ranging from 26% in LA to 56% in Atlanta. A high proportion of white-collar jobs in these places can be performed out of offices and have a ripple effect on the economy.
Using data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages, the researchers tracked employment changes in 2020 by city and industry. Even with no change in space per worker, employment effects alone will cause the value of commercial real estate to fall by an average of 6% — from 1% in Austin to 13% in San Francisco — they found. With two days or less of work-from-home, that number rises to 12%, and three or more days of work-from-home, it’s 25%.
The report found that New York and San Francisco are the most vulnerable of the eight cities, with predicted commercial price drops ranging from 25% to 43%.
“Declines are smaller, but still significant, in the other cities,” the report says.
Using a special database on city finance, the researchers translated the decline in CRE property values into effects on property tax and city revenues. Larger cities with diversified revenue structures won’t feel as much impact, but smaller cities like Austin and Miami, which are more dependent on property tax, will have to adjust.
The analysis found that Atlanta will have the largest revenue effect, with an estimated 5.7% loss. Austin, New York and San Francisco face revenue losses between 2% and 4%.
Cities and states have gotten fiscal relief this year under the federal American Rescue Plan, but those funds will phase out between 2022 and 2024. The report’s authors say that one future solution may be to divert funds away from suburbs to city centers most affected — but warn that any reallocation is likely to draw “furious resistance” from jurisdictions that would be the perceived losers in any such shift.
The authors said there’s a “paradox” in cases like Florida and Texas. Political leaders tout low taxes and no income tax, but those states will soon see economic detriment in their major cities as they face negative impacts from the increase in working from home.
Some leaders have long predicted these problems. In Texas, lower taxes, light regulation and cheap housing lured 4.2 million people and hundreds of corporations in the past decade, but left little revenues for infrastructure improvements and social services — deficiencies that were evident during a winter storm and a massive power outage last winter.
“We are not sufficiently looking down the road. And we're not sufficiently investing,” former Houston Mayor Annise Parker, who led the city from 2010 to 2016, told Bisnow in February.
"The bill will come due," University of Houston Political Science professor Brandon Rottinghaus told Bisnow.
