The Urban Challenge: Can Cities Fill the Tax Gap Created by Empty Offices?
The rapid shift to hybrid work models has left many office buildings in America’s biggest cities partially empty, a development that could threaten cities’ tax bases and the vitality of their central business districts. Most city leaders recognize the seriousness of the problem and have proposed solutions that generally fall into one of two categories: converting offices buildings to housing, or luring residents and businesses downtown, often with the use of incentives. We think both approaches are well-intentioned, but face daunting challenges. Simply put, filling the holes left by departing office workers will not be easy, in our view.
The size of the problem
A widely used barometer by Kastle Systems puts the size of the problem in stark relief. Over the past 38 months, the percentage of in-person use of offices has fallen from around 99% to 50%. We believe office occupancy is unlikely to return to pre-pandemic levels. The steep decline has the potential to cut property tax receipts, particularly in large cities such as Dallas, Chicago, Washington, D.C., and New York, where commercial real estate represents anywhere from 20% to 45% of the taxable real estate base.i Most major cities rely primarily on taxes from residential and retail space. The weak office market could also cut income and sales taxes receipts as fewer people come downtown to work. It is worth pointing out that, so far, sales tax revenues have generally held up well.