Office buildings remain half empty but US cities can ignore it

Office occupancy in the 10 largest U.S. metropolitan areas reached a new high of 53% in the week ending Jan. 31, according to Castle Systems, a building security company. The company’s barometer on how corporate return-to-office policies are going has been hovering around the same level for 13 months. Still, cities are ignoring vacant offices and its impact on the commercial real estate market as best they can for the time being.

“Commercial real estate is not a major driver of general fund revenues for most local governments,” Michael Rinaldi, head of U.S. local governments at Fitch Ratings, said in an email. “With careful expense management and/or decline can be managed.” Stability in other revenue sources including residential property tax, sales tax, utility tax, etc.”

Employees’ reluctance or in some cases refusal to return to offices has roiled the real estate market, with Moody’s Investors Service this week downgrading New York Community Bancorp to junk after it said it was cutting payments. and accumulating reserves to cover troubled loans. commercial real estate.

Of course, the basis of most municipal finances is property taxes. And any decline in a property’s assessed valuation, which is affected by vacancy rates, will translate to a reduction in taxes collected. How deep those declines are can vary and will determine the impact on each city.

The Castle Back to Work Barometer, which measures employee entry into offices served by firms, hit a low of 14.6% in April 2020 and reached 50% for the first time in January 2023. Despite companies requiring employees to return to offices, some are threatening dismissal if they do not comply, with measures falling during the summer holidays and in the weeks between Christmas and New Year, with measures remaining at around the same level. It is made.

For those cities with large central business districts, Rinaldi said any pressure would be “more meaningful but not insurmountable.”

“The full impact of declining commercial real estate valuations on tax revenues will likely be phased in over several years, allowing time to put contingency plans in motion,” he said.

Scott Nice, director and principal analyst at S&P Global Ratings, agreed in an email that any decline in the commercial real estate market would be felt only gradually, and most cities would see “some level of ‘tax-shifting,'” While residential and given that the share of office in assessed value has declined compared to other properties, other commercial properties bear a larger share of the tax burden.”

Still, he said S&P “sees a stable credit picture for most major cities, but one that is evolving and where risks are likely to continue rising for at least the next few years.”

More stories like this are available on Bloomberg.com

©2024 Bloomberg LP

Milestone alert!
Livemint tops charts as fastest growing news website in the world Click here to find out more.

Here’s a detailed 3-minute summary of everything Finance Minister Nirmala Sitharaman said in her budget speech: Click to download!

Published: February 10, 2024, 12:41 am IST