Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Monday, May 03, 2021

Speaking of urban economics and comprehensive/master plans: a move to remote work could crush center city tax revenues

Even before the pandemic, the cratering of retail was going to have a big impact on the valuation of commercial property.  And commercial property is a major revenue stream for center cities.  Although before the pandemic, the valuation decline hadn't really started flowing much to city budgets ("The next economic crisis: Empty retail space," POLITICO).

With the pandemic's emptying of commercial office buildings in favor of remote work, and since then many companies have stated they will be shifting to more flexible working conditions, including remote work ("Salesforce rolls out permanent remote work plans,"Working from home: The future of business is remote," ZDnet), there will be a significant drop in demand for office space.

And fewer workers downtown also means fewer customers for adjacent retail and food service businesses and fewer riders on transit ("COVID-19 Has Been 'Apocalyptic' for Public Transit. Will Congress Offer More Help?," TIME Magazine. "'Do I Really Need This Much Office Space?' Pandemic Emptied Buildings, But How Long?," NPR).  

It means reduced transportation demand some, but it also spreads it out in a deconcentrated manner, rather than concentrating it, as activity centers do.

There have been articles about how reduced demand for office buildings in center cities  creates opportunities for housing development as adaptive reuse ("Following pandemic, converting office buildings into housing may become new ‘normal’," Washington Post).

But those articles tend not to mention that there are serious economic implications from conversion of these properties, specifically a decline in commercial property tax revenues ("Coronavirus Has Caused Sharp Decline in Commercial Property Values,", "Empty Office Buildings Squeeze City Budgets as Property Values Fall," New York Times).

Separately there is the issue of the drop in tourism as a result of the pandemic, which affects retail and hospitality industries.

Similarly, the impact on the entertainment business (concerts, sports events, etc.) and cultural institutions, like museums.

These declines also impact commercial property valuation ("Commercial Real Estate’s Pandemic Pain Is Only Just Beginning," Bloomberg).

I've mentioned before that DC needs to more actively manage the attractiveness, centrality, and importance of its central business district:

-- "Could bringing premier regionally headquartered business enterprises to the Pennsylvania Avenue Corridor be key to its renewal and revitalization?," 2014
-- "Why Mayor Bowser is right to be leery of systematic lowering of taxes," 2015
-- "DC, Transformational Projects Action Planning, and the Baltimore-Washington Maglev project," 2021

I doubt that's much discussed in the Comprehensive Land Use Plan revision.

And some believe things won't change much ("Workers are slowly returning to offices: Dallas takes the lead, while San Francisco and NY trail behind," USA Today).

San Francisco faces first property tax revenue drop in decades.  Bloomberg reports on San Francisco, "San Francisco Feels a Tax-Base Chill With First Drop in 25 Years," and how it projects a significant decline in commercial property tax revenues as a result of changes to how people work as a result of the pandemic as well as the decline in tourism.  From the article:

... the virus that drove out residents and kept tourists away will likely make this downturn different. The city controller’s office estimates that San Francisco’s commercial and residential property tax base fell 0.46% over 2020, a decline that would translate to a $7.8 million drop in revenue for the fiscal year beginning in July.

That’s not so big as to threaten the creditworthiness of San Francisco, which sold bonds Tuesday. But the mere possibility of a decline in that tax base is a big switch for a city that benefited from a years-long tech boom that seemed to mint new millionaires every day. 

It’s those techies -- from companies such as Uber and Salesforce and Twitter -- that may make San Francisco more vulnerable to a prolonged pandemic downturn than perhaps every other major city in the country. Given the option to work remotely, many of them have decamped to cheaper spots like Lake Tahoe and suburban Sacramento, and some are showing little desire to return to their Bay Area offices soon. If this shift drives down demand for office space and homes enough, it’ll sink property values so much that the city’s bottom line gets hit even more. 

 “San Francisco’s almost got a state of emergency in its economics,” said Ken Rosen, professor emeritus at the Haas School of Business at the University of California at Berkeley who focuses on real estate. With an expected fall in commercial property values, “there’s no question that’s going to make the city have very tight budgets the next few years.”

Conclusion.  Recovery from the pandemic will be complicated and there will have to be a constant watch on changes in the commercial property market and how this will impact local budgets.  Especially because stressed property owners will be active in challenging property assessments, and could even seek additional inducements and tax incentives to improve their buildings in the face of exogenous changes to the market.

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At 8:14 PM, Blogger Richard Layman said...

The Seattle Times: Downtown Seattle dying? Not so fast. Demand for office space roars back to pre-pandemic levels.

At 11:19 AM, Blogger Richard Layman said...

The Wall Street Journal: Suburban Homes and Retail Are the Budding New Office Hotspot.

At 11:50 AM, Blogger Richard Layman said...

The Boston Globe: What if we turned empty offices into housing?.

At 12:52 PM, Blogger Richard Layman said...

Covid-19 is affecting CRE lease negotiations. Here's what experts are seeing.

including adding clauses wrt pandemics, government shutdowns, government restrictions (such as capacity limits on restaurants) and leverage for relief.

Questions about ventilation and other issues.

At 10:37 AM, Anonymous charlie said...

What you're seeing on the residential side, is that absent SF and NYC the migration from cities just looks like an accelerated version of what happened before -- people moving to suburban areas.

No question both SF and NYC are seeing something different. I could make the case that the NYC one will wash out. Finance will be the big dog there for a long time. Tech -- well, that is great from WFH or from Aspen or Hawaii or someplace nicer.

NO question that is also related to oversized prices housing prices of both cities. Nobody else is near that league.

On the CRE front, may be more broadbased. In DC Feds are talking up hybrid model a lot as they can hot bunk offices. It's one of the few federal perks left -- offices tend to be larger (although not nicer) than private sector. Law firms are doing the same thing.

This is the SF budget planning for five years:

Governments love straight line projections because it makes their jobs easier. But not looking great.

Again I found a good chart (bloomberg?) on the racial equity component of this; again DC is actually doing ok but NYC is doing horrible. I'll see if I can find it. Graphic intensive.

At 8:54 AM, Anonymous charlie said...

Also, we've talked about this before -- the Republican model for a mayor.


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