Some of America’s largest cities face the risk of entering an economic “doom loop” due to the sharp decline in the office real estate market. Stijn Van Nieuwerburgh, a real estate and finance professor at the Columbia School of Business, has been sounding the alarm for months on the negative impact of remote work trends on commercial real estate in mid-sized cities like Atlanta, Chicago, and Denver.
These cities now have some of the highest office vacancy rates in the US, according to Nieuwerburgh. In fact, office vacancies across the country have reached an all-time high this year. This could have dire economic consequences since property taxes constitute a significant portion of total tax revenue in many states, with office taxes alone accounting for up to 10% of this revenue.
Nieuwerburgh warns that if office values were to decline by approximately 50%, tax revenues would be severely affected, creating substantial budget deficits. The problem is particularly acute for smaller cities, as their downtown areas often heavily rely on the commercial office district. Therefore, when this district experiences difficulties, the entire city is impacted.
The fallout from declining office demand could lead to higher tax rates and plunging property values in affected cities. Some estimates suggest that office building prices could plummet by as much as 35%. Additionally, banks with significant exposure to office debt may face challenges, as approximately $600 billion in office building debt is at risk.
The commercial real estate sector has struggled to recover from the pandemic, with credit conditions further exacerbating the situation. Banks are already reducing lending and seeking to unload their commercial real estate debt, which further complicates the economic outlook.
Sources:
– Business Insider
– National Association of Realtors