Residents May Have to Foot the Bill for Empty Office Space: Experts

Midtown Manhattan buildings in New York City on March 4, 2021. Spencer Platt/Getty Images

The effects of remote and hybrid work schedules that emerged from the global pandemic are hitting American city office space hard. There is now more empty office space in the United States than at any time in more than 40 years. According to Moody’s Analytics, the national office vacancy rate rose to just under 20 percent, the highest since they began measuring office leasing vacancies in 1979.

With interest rates high for refinancing on these buildings and banks wondering if they’ll ever see repayment of the loans they made to build them, there is a deep concern nationwide that some are going to have to take drastic measures to survive a decreasing amount of downtown businesses and the tax revenue needed to run their cities. Not only will the operation of local government be affected, but so could funding for schools and road upkeep.

David Merriman, James J. Stukel presidential professor of public policy management and analytics at the University of Illinois Chicago, says city residents and visitors may have to take on the tax burden eventually.

“The most obvious thing is to put more burden on homeowners,” he said to The Epoch Times. “People have been predicting the demise of cities since the internet came along in the 1990s. The possibilities are that I think cities need to have revenue, and there are various possibilities without making any structural changes. If you need to get revenues for some form, you need to change the tax rates or add new revenue sources, such as a local raise in income or sales taxes.”

‘Ghost Towers’

The massive change in how people go to work, transitioning from 9-to-5 jobs to coming into the office two or three days a week, or not at all, has exposed an overabundance of buildings built in the 1980s and 1990s to satisfy a full-time office workforce. But there’s an abundance of more recent builds sitting empty in major cities that some refer to as “Ghost Towers.”

The most celebrated example is Oceanwide Plaza, which began to appear on the Los Angeles skyline in 2019. Built by Chinese developer Oceanwide Holdings, the project was stopped after a billion dollars of equity had already been invested as the company looked to find the capital needed to finish it. The building remains unfinished and has now been taken over by graffiti artists who have tagged almost every floor, turning it into one of the nation’s most expensive urban art projects.

In San Francisco, government officials have estimated that empty office buildings could cut city tax revenues by as much as $200 million in 2028.

In New York City, a 670-foot tower near the South Street Seaport is referred to by some as the “Leaning Tower of Manhattan” and sits unfinished due to several engineering and funding problems. Office space in New York contributes 20 percent of the city’s tax revenue and government officials there are bracing for an estimated shortfall of $1.1 billion by 2027.

In Washington, where a glut of office space remains empty, the projected drop in property values could cost $464 million in combined tax revenue over the next three fiscal years according to the local government.

According to Boston’s Tax Policy Center, taxes on commercial property account for almost 36 percent of its total general revenues, with other cities like Dallas (26 percent) and Atlanta (19 percent) also having a high dependence on commercial property taxes.

Empty office space is also hampering the economic plans of downtowns in smaller cities like Charlotte, where the city is looking for answers to fill open uptown towers. The home to banking giants Wells Fargo and Bank of America, Charlotte’s square footage of office space per employee is at a 22-year low, according to a presentation that the council’s economic development committee heard in January. Over the next year and a half, leases in Charlotte will expire on 1.7 million of the city’s 23 million square feet of office space in the central business district.

Columbia Business School real estate professor Stijn Van Nieuwerburgh believes that cities in empty office space peril should have seen this coming.

“I’ve been saying the same thing for a year and a half that this is a train wreck in slow motion,“ he said to The Epoch Times. ”Leases are rolling off and not getting renewed, or companies are electing to use less space. Loans are coming due with adjustable-rate mortgages and even if you can refinance, you can only borrow half of what you did before.”

When cities began to realize after the COVID-19 pandemic, they had a big problem with empty office space that may never be used in its original form again. Many called for the transition of those buildings to residential housing. However, they soon found that only some of the office buildings were transferable due to structural design or cost.

Mr. Van Nieuwerburgh pointed this out as part of a paper examining how remote work impacts real estate values and the urban environment, calling that factor the “urban doom loop.” One of his solutions to the issue is that cities should immediately stop building.

“Only 10 percent to 15 percent of office buildings are physically convertible to residential. Fiscal intervention to stimulate these conversions will happen through demolition and some will occur if we have no new office construction builds for 10 years. After that, the market will somehow find a new equilibrium,” he said. “Cities have been transforming for centuries, like Detroit and New York in the 70s.”