Rapid Work Style Shifts Are Tanking Tax Revenues — Can City Planners Catch Up?

• As the workforce shifted dramatically to working remotely, commercial office real estate vacancies exploded in many major cities.
• Most large metro areas have been slow to adapt to new modes of working, and are grappling with the challenge of how to repurpose office buildings. 
• Urban planners must pivot to repurpose vacant office space into coworking, residential, and affordable housing.

Add another name to the list of those whose only New Year’s wish is for employees to return to the office: tax collectors. 

Municipal governments across the U.S. are staring down disappointing property tax revenues largely due to the dramatic shift in the commercial real estate landscape nationwide as so many companies have moved to a 100% remote workforce.

“New York raises almost $1 billion annually from a tax on large commercial leases, which could fall if demand from big tenants like law and financial-services firms remains soft,” Bloomberg reported. 

City leaders must work quickly to keep up with the shift to remote work and the ripple effect it has on urban areas. To avoid catastrophic tax revenue losses, urban planners must pivot to repurpose vacant office space into coworking, residential, and affordable housing.

“Longer-term shifts in work habits still loom, and it matters to more than just building owners. New York, like other cities, relies heavily on property taxes to fund schools, police, and firefighters, as well as other services,” according to Bloomberg. “Property taxes are the biggest source of revenue for the city, delivering about $1 out of every $3 taken in. And offices account for about one fifth of that.”

The future of work is changing the shape of urban life

“There’s no part of the world that’s untouched by the growth of hybrid working,” said Richard Barkham, global chief economist of commercial real estate firm CBRE Group Inc., to Bloomberg.

A recent study by Columbia University estimated the impact of these changes in a paper titled

“Work From Home and the Office Real Estate Apocalypse.” The researchers discuss the pandemic and the long-term decline in office values.  

“We find a 45% decline in office values in 2020 and 39% in the longer-run, the latter representing a $453 billion value destruction. Higher-quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower-quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability,” according to the study. 

Many commercial real estate experts are optimistic and see this enormous “value destruction” as a normal indicator of a volatile real estate market in flux combined with long tail changes in work patterns. This loss of value, in other words, may be temporary until empty office spaces can be transformed or repurposed to meet the demand for hybrid work, housing, and hospitality.    

A volatile CRE market: abandoned projects and abrupt pivots

The seismic impact of the shift to remote work is not hard to find.

The future of the Peachtree Center, an iconic cornerstone of Atlanta’s downtown area, remains uncertain due to high vacancy rates and the owner’s inability to pay down its debt. The high vacancy rates are directly related to the shift toward remote work.

“Six office towers and an underground mall in downtown Atlanta are back in the hands of their lenders after the owner defaulted on a loan,” The Seattle Times reports, “a foreclosure that points to continuing uncertainty in the market for office space since the pandemic prompted much of America’s workforce to work from home.”

This is just one reflection of how the future of work will continue to shape city skylines. 

Large-scale planned commercial construction projects in large metro areas have come to an abrupt halt.

Robinhood, the well-known fintech company, had big plans to build a corporate office in Charlotte, N.C., but it nixed the $11.7 million office complex project that would have been a center for customer service, client success, and an estimated 400 jobs.

Major corporations that fund large construction projects for offices have also been backing off to attract talent — sometimes in the middle of a project.

A fundamental shift in the way people want to work

Centene, a managed healthcare solutions company with a valuation of more than $45 billion (NYSE: CNC) and 72,000 employees, halted construction on a gigantic complex in Charlotte’s University City area in August that would have established Centene’s headquarters there. 

The project was to be a massive public-private partnership that would have established 3,200 jobs and brought more than $1 billion in investment to the city.

The company blamed the abrupt change in plans on the necessity of allowing most employees to work remotely. Centene said that allowing workers flexibility is essential to finding and keeping talent.

“Since announcing our plans to establish an East Coast headquarters in Charlotte, North Carolina, there has been a fundamental shift in the way people want to work. Today, almost 90% of our workforce is working fully remote or in a hybrid work environment, and workplace flexibility is essential to attracting and retaining our top talent,” Centene said in a press release.

The challenge of repurposing workspaces

Farther up the East coast, the strain on commercial real estate in New York City is immense. 

Bloomberg discusses the complexity involved in repurposing older office buildings into residential and multipurpose properties due to New York’s zoning laws and the expense of upgrades. There are requirements for air and light, among other issues, and office blueprints don’t often divide well into appropriately sized living spaces.

Many of the office towers in the midtown area of the city have not been upgraded in years. Meanwhile, new buildings in more appealing neighborhoods are attracting commercial real estate investment and workers who still need office space. 

“A strip on Manhattan’s Third Avenue, from 42nd to 59th streets, shows the problem of older properties in stark terms. While New York leasing demand has bounced back toward pre-pandemic levels, the corridor has 29% of office space available for tenants, nearly double the amount four years ago and above the city’s overall rate of 19%, according to research from brokerage firm Savills,” according to Bloomberg.

This dramatic shift in office vacancy rates in certain parts of the city can have a ripple effect that leads to street-level businesses closing — and lower property tax income for the city.

Commercial Property Taxes and Essential City Services

Many city dwellers may be unaware of how many basic services like schools and police are partially funded by the tax collected on large commercial projects, expensive apartment towers, and the towering office spaces they walk by every day. 

With more office vacancies being reported long-term in cities like New York, it will be essential for public and private partnerships to work together to enable the spatial transition that hybrid and work-from-home require. 

City leaders will need to work with private investment groups, and businesses must listen to workers who are demanding more flexible work lives. City life may become rather bleak if large metro areas are unable to collect the property tax they have depended on for years to fund standard services like education, infrastructure, and public transportation.

While business leaders continue to argue over remote and flexible work — and cities make renovations to vacant offices difficult with arcane zoning laws and a lack of incentives — the quality of life of these cities will remain under threat.