The Coming Real Estate Implosion

Let’s say that you care about the future. Let’s say that you want to be able to predict what life will be like in the Big City a few years from now?

When Eric Levitz asked the questions in New York magazine he decided that the best place to start was with real estate, especially with commercial real estate. 

And, to his credit, he proposed a solution to all of the empty office buildings. He recommended that we transform them into condos-- into residential buildings.

It’s a great idea, and would be greater still if the New York residential real estate market was not also going into the tank. In short, the people who are not going to their offices might not be happy to live in an office corridor.

Levitz blames it on remote work:

The nation’s office buildings aren’t as empty as they were before COVID vaccines became widely available in spring 2021. But they’re still far less populated than they were in 2019. A recent analysis of Census Bureau data from the financial site Lending Tree found that 29 percent of Americans were working from home in October 2022. In New York City, financial firms reported that only 56 percent of their employees were in the office on a typical day in September.

Full-time remote work has grown less prevalent since the worst days of the pandemic. But flexible work arrangements — in which employees report to the office a couple times a week — are proving stickier. A recent paper from the National Bureau of Economic Research estimated that 30 percent of all full-time workdays would be performed remotely by the end of 2022.

As for the deeper meaning, the real problem, for the city, involves lost tax revenue:

And collapsing office attendance rates are taking cities’ tax revenues down with them.

When only 50 percent of a company’s staff leave their homes in the morning, that firm’s desire for floorspace plummets. If storm-clouds appear on the economic horizon — like, say, a central bank dead set on slowing the economy to kill inflation — downsizing your office becomes the easiest way to cut expenses. Thus, as rising rates have laid tech low, San Francisco’s signature office towers have emptied out. In New York, meanwhile, Meta has ditched 450,000 square feet of office space.

Across the nation as a whole, only about 47 percent of offices are occupied.

Along with taxes, property values are cratering:

A recent study from New York University’s Stern School of Business found that office values fell 45 percent in 2020, and are likely to remain 39 percent below pre-pandemic levels for the foreseeable future. If that projection proves true, it would wipe $453 billion in property values off American cities, thereby slashing a critical source of municipal revenues.

And this is bad news for cities that, like most cities, rely on tax revenue:

In New York City, property taxes are the single largest source of public funds, supplying one-third of the city’s tax revenue. Office buildings account for one-fifth of that sum. The declining market value of Manhattan’s major office districts alone cost the city $5.24 billion in revenue.

Remote work’s toll on cities does not end with its implications for property tax revenue. Enable suburban commuters to work from their dens several days a week, and you transfer all manner of smalltime commerce — lunch orders, after-work drinks, etc. — from the urban core to its periphery. And lost transactions mean lost sales taxes. U.S. cities expect their sales tax revenues to decline by an average of 2.5 percent in 2022, according to a survey from the National League of Cities. Last year, New York City Comptroller Scott Stringer estimated that remote work would cost the city $111 million in sales tax receipts annually.

Lower revenues mean fewer services. Fewer services will cause more people to leave the big city:

Falling revenues could translate into lower-quality public services (e.g. less reliable subways, less well-maintained infrastructure, lower performing public schools, stingier safety nets), which render cities less attractive to high earners, who then decamp for the suburbs in greater numbers, thereby depressing revenues further. Meanwhile, underpopulated downtowns are less conducive to successful small businesses and more conducive to crime. As central business districts become home to fewer restaurants and more criminal activity, more firms will flee them, leading to even more underpopulated office towers.

As for the difficulties in transforming office buildings into apartment complexes, Levitz has some suggestions:

Alas, converting office buildings into housing is easier said than done. Commercial buildings tend to have far fewer bathrooms and kitchens than residential ones require. Which means that any conversion demands reconstructing a tower’s plumbing and electrical systems. Expenses add up quickly, especially at a time of elevated construction costs.

The liberation of America’s white-collar homebodies need not come at cities’ expense. The remote work revolution could devastate municipalities’ downtowns and finances, or it could help resolve their housing crises. If they can summon the requisite policy imagination and flexibility, city officials can make “work from home” work for everyone.

It feels a bit optimistic to me, but… whatever.