COVID-19 dramatically altered how and where many employees work, a shift that could have a long-term negative effect on commercial real estate occupancy rates and, ultimately, on local governments’ tax revenue base, a new study reveals.
The Impact of Work from Home on Commercial Property Values and the Property Tax in U.S. Cities concludes that even as the recovery strengthens, if trends persist, demand for commercial real estate space could fall by as much as 25%, properties’ assessed values could decline in some places, and city property tax revenue could face a sharp decrease. Researchers from the City University of New York and the University of Illinois Chicago conducted the study to be released today by the Institute on Taxation and Economic Policy.
“The move to working from home for many employers and their professional staff helped businesses remain productive during the lockdown and since,” said lead author Howard Chernick, professor emeritus at City University of New York’s Hunter College. “But this shift will have tangible repercussions for commercial real estate occupancy rates and values, especially as some employers consider a permanent or partial shift to a remote work model.”
“This study should raise concerns for local and state government. Property assessments usually lag. While governments may not yet be experiencing the effects of declining property assessments, they will if current trends persist. Now is the time to implement policies that address this coming challenge,” said co-author David Copeland, adjunct lecturer at Hunter College.
The study examines eight major cities (Atlanta, Austin, Charlotte, Chicago, Los Angeles, Miami, New York and San Francisco). In these cities, commercial real estate accounts for an average of 37% of property taxes, ranging from 26% in Los Angeles to 56% in Atlanta. The researchers used data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages to track employment changes in 2020 by city and industry and to estimate the direct effect of the COVID-19 recession on the demand for commercial space. The report includes a full explanation of the methodology, which includes use of a specially developed comprehensive database on city finance.
Cities that rely heavily on property taxes will see bigger declines in revenue because of depressed commercial real estate assessments. Larger cities in the report’s sample (New York, Los Angeles and San Francisco) have more diverse revenue streams, while smaller cities (Austin and Miami) depend more on the property tax. Because of relative dependence on the property tax and a large share of commercial property, the researchers estimate Atlanta would have the largest revenue decline (5.7%). The lowest predicted revenue declines are for Los Angeles and Charlotte — between 1% and 2%. The Charlotte results reflect the city’s economic strength, a relatively small share of commercial property tax base at risk from working from home and a low share of the property tax in total revenue. For Los Angeles, the lower forecasted impact is principally a reflection of the low share of commercial property …….