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Four years after Covid-19 filled hospital emergency rooms, closed schools and emptied out cities, US offices remain about half vacant.<\/p>\n
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\u00a0Kastle Systems<\/a>, a firm that provides security to buildings. The firm\u2019s\u00a0barometer<\/a>\u00a0on 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.<\/p>\n \u201cCommercial real estate is not a key driver of general fund revenues for the majority of local governments,\u201d said\u00a0Michael Rinaldi, head of US local governments at\u00a0Fitch Ratings<\/a>, in an email. \u201cDeclines can be managed through careful expenditure management and\/or stability in other revenue sources, including residential property taxes, sales tax, utility taxes, etc.\u201d<\/p>\n The reluctance or in some cases refusal of workers to return to offices has shaken the real estate market, with\u00a0New York Community Bancorp<\/a>\u00a0being cut to\u00a0junk<\/a>\u00a0this week by\u00a0Moody\u2019s Investors Service<\/a>\u00a0after it said was slashing payouts and stockpiling reserves to cover troubled loans tied to commercial real estate.<\/p>\n To be sure, the bedrock of most municipal finance is the property tax. And any decline in a property\u2019s 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.<\/p>\n The\u00a0Kastle Back to Work Barometer<\/a>, 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\u2019t comply, the measure has remained around that level, with dips during summer holidays and the week between Christmas and New Year\u2019s.<\/p>\n For those cities with large central business districts, Rinaldi said any pressure would be \u201cmore meaningful but not insurmountable.\u201d<\/p>\n \u201cThe 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,\u201d he said.<\/p>\n Scott Nees, director and lead analyst at\u00a0S&P Global Ratings<\/a>, agreed in an email that any decline in the commercial real estate market would be felt only gradually, and that most cities would see \u201csome level of \u2018tax-shifting,\u2019 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.\u201d<\/p>\n Still, he said S&P sees \u201ca 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.\u201d<\/p>\n<\/div>\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n