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Empty Office Buildings Squeeze City Budgets as Property Values Fall

  • March 03, 2021

The pandemic has upended America’s commercial property sector. In cities across the country, skyscrapers are dark, shopping centers are shuttered and restaurants have been relegated to takeout service. Social-distancing measures have redefined workplaces and accelerated the trend of telecommuting. The $16 trillion commercial property sector is being stressed in ways not seen since the Great Recession of 2008.

According to Moody’s, the credit rating firm, commercial real estate values are projected to decline by 7.2 percent nationally from their pre-pandemic levels, bottoming out by the end of this year. The hardest-hit categories are the office and retail sectors, with values declining by 12.6 percent for offices and 16.5 percent for retailing.

American cities are facing red ink for a broad swath of reasons, but the pain is unevenly distributed. In some cases, rising residential real estate values will make up for the commercial property downturn, and some segments, such as warehouses, have been doing well as online shopping lifts demand for distribution centers. States that do not have income taxes, such as Florida and Texas, are more vulnerable to fluctuations in real estate values.

The overall picture is problematic, and the National League of Cities, an advocacy organization, estimates that cities could face a $90 billion shortfall this year.

Big cities are bearing the brunt of the office exodus. Figures provided by CoStar show that available office space in some of the largest markets swelled from the end of 2019 to the end of 2020. Unused space in San Francisco increased nearly 75 percent last year, while empty office space increased more than 25 percent in Los Angeles, Seattle and New York City.

Mayor Bill de Blasio of New York warned in January that property tax revenues were forecast to fall by $2.5 billion next year as the value of hotel, retail and office properties has fallen by 15.8 percent. With real estate making up about half of New York’s annual tax revenue, the city is planning to cut thousands of jobs this year.

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