Four years after Covid-19 filled hospital emergency rooms, closed schools and emptied out cities, US offices remain about half vacant.

Office occupancy in 10 of the largest US metropolitan areas rose to a new high of 53% for the week ended Jan. 31, according to Kastle Systems, a firm that provides security to buildings. The firm’s barometer on how corporate return-to-office policies is going has been hovering around that level for 13 months. Yet, cities are shrugging off empty offices and its implications for the commercial real estate market because they can, for now.

“Commercial real estate is not a key driver of general fund revenues for the majority of local governments,” said Michael Rinaldi, head of US local governments at Fitch Ratings, in an email. “Declines can be managed through careful expenditure management and/or stability in other revenue sources, including residential property taxes, sales tax, utility taxes, etc.”

The reluctance or in some cases refusal of workers to return to offices has shaken the real estate market, with New York Community Bancorp being cut to junk this week by Moody’s Investors Service after it said was slashing payouts and stockpiling reserves to cover troubled loans tied to commercial real estate.

To be sure, the bedrock of most municipal finance is the property tax. And any decline in a property’s assessed valuation, which are affected by vacancy rates, will translate to a decrease in taxes collected. How deep those declines are can vary and will determine the impact on each city.

The Kastle Back to Work Barometer, which measures employees swiping into offices that the firm provides services to, hit a low of 14.6% in April 2020 and first reached 50% in January of 2023. Despite companies requiring employees to return to offices, some threatening dismissal if they don’t comply, the measure has remained around that level, with dips during summer holidays and the week between Christmas and New Year’s.

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

“The full impact of commercial real estate valuation declines on tax revenues will likely be phased in over several years allowing time for contingency plans to take hold,” he said.

Scott Nees, director and lead 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 that most cities would see “some level of ‘tax-shifting,’ where residential and other commercial properties end up shouldering a larger share of the tax burden, given that the office share of assessed value has declined relative to other properties.”

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 amplifying through at least the next few years.”

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