The profound impact of remote work on the office sector—and the resulting negative consequences for municipal tax revenues—were the focus of reports this week on current marketplace pressures and long-term office forecasts.
- A weak return-to-office rate for employees working under hybrid arrangements, combined with rising interest rates and asset value pressures, have led to increased office vacancy rates and loan defaults in many cities, according to a Feb. 21 Wall Street Journal report.
- Roundtable Board Member Scott Rechler (Chairman & CEO, RXR) is quoted by the Journal on how the office sector may eventually emerge from the current cycle. “There’s a transition period that takes time. You have to cross the chasm into the new regime,” Rechler said. (WSJ, “Office Landlord Defaults Are Escalating as Lenders Brace for More Distress”)
- A Feb. 22 Cushman & Wakefield report forecasts that the overall level of office vacancy by 2030 will be 55% higher than prior to the pandemic (Q4 2019)—a trend that could be countered by repositioning and repurposing current space usage in coordination with public-private efforts at the local, state, and federal levels. (C&W’s “Obsolesence Equals Opportunity” and Fortune, Feb. 22)
- The report also states that as much as 25% of all U.S. office space is “growing increasingly undesirable and will need to be reimagined and made relevant for the future,”—and that approximately 60% of all current office stock is “facing competitive obsolescence.” (BisNow, Feb. 23)
- The Cushman & Wakefield report concludes, “Eventually, the remote working dynamic will flow completely through the marketplace as pre-pandemic leases expire and as firms shed the space to meet new-era, hybrid work requirements.”
The Roundtable View
- The Real Estate Roundtable’s Q1 Economic Sentiment Index released last week shows that Class B office properties are struggling, asset values have fallen year-over-year, and availability of debt and equity capital have declined.
- Roundtable President and CEO Jeffrey DeBoer, above, said, “Fundamentally, our Q1 index illustrates that the trends accelerated by the pandemic have led to mixed performances across asset classes. In the office sector, remote work policies, concerns over crime and transportation are driving record-high vacancy rates throughout the country, hurting city budgets and small businesses.” (Roundtable news release, Feb. 17)
- DeBoer added, “Policymakers should emphasize the need to return to the workplace while considering other innovative solutions such as legislation to convert underutilized offices to housing.” (Roundtable Weekly, Feb. 17)
- DeBoer and Roundtable Chairman John Fish (Chairman & CEO, SUFFOLK) submitted comments last Dec. to President Biden encouraging support for legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” (Roundtable Weekly, Dec. 16, 2022)
- The Roundtable’s letter to Biden emphasized that work-from-home policies are damaging the economy, cities, and communities. “We are concerned that certain Administration policy guidance is encouraging federal agencies to adopt permanent work-from-home policies for federal employees and thereby actually magnifying negative economic and social consequences for cities,” the letter stated.
Tax Incentives & Remote Work
- Private companies may be motivated to enforce stronger employee return-to-office policies if they wish to qualify for city and state tax incentive agreements.
- Provisions built into some existing municipality agreements were designed to ensure that private sector jobs would boost local revenue from income, sales and property taxes, and bolster downtown economies. (Bloomberg, Feb. 21)
The Bloomberg report offers several examples of how state and city officials are reevaluating current incentive agreements and designing new ones that detail the scope of employee location requirements for companies to qualify for tax breaks.
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