Covid-19 and commercial real estate: the threat to city finances

The COVID-19 pandemic has upended the traditional economies of large cities. Mass adoption of remote working has reduced the value of living close to city centers along with demand for office space. A sharp adjustment in property prices is likely, presenting cities with significant fiscal risks. In response, mayors (and governors) will need to rethink the role of city centers and actively work to shore up revenues.

Cities are economic powerhouses

The stakes are high. If cities are at risk, the entire economy will suffer, not just current home owners and businesses. Cities are economic powerhouses, driving productivity, economic growth, and the revenues which pay for vital public services.

Figure: Break down of economic activity in the United States

The map shows just how dominant big cities are in the economic landscape: 50% of economic activity in the United States is generated by a small number of cities and their metro regions. Their fiscal health is crucial for cities to continue to make their vital economic contribution.

Key sectors are downsizing in the centre…

In key central city industry groups – information, finance, professional, scientific and technical, and management – a majority of jobs can be performed away from the office, and many of them have converted to remote work during the pandemic. These four industries account for 41% of the total wages paid in Chicago, Los Angeles, San Francisco, Atlanta, Miami, Charlotte NC and Austin TX, and more than 60% in New York City.

Our recent study finds that even with a strong economic revival, the demand for space and the average price of commercial real estate will fall between 12% and 25%, depending on the extent of remote working in the new normal. New York, San Francisco, and Chicago are among the most vulnerable cities, and could see commercial property values plummet by between 25% and 40%.

Our predictions for New York City align closely with the official assessment rolls for 2022, as well as the view from financial markets. While the share prices of industrial and warehouse Real Estate Investment Trusts (REITs) have done well, office REITS have lagged behind.

Market performance of New York REITS compared to the Russell 1000 stock market

Indexed Performance of NYC REITs: January 2020-December 2021

While new office buildings are doing well, an investigation by the New York Times1 that focuses on the iconic Empire State Building illustrates the problem faced by older buildings. Of the few leases that have expired since the pandemic, most smaller tenants have chosen not to renew. One of the larger tenants reported that the landlord offered a “sweet deal” as an incentive to re-sign the lease. As more leases expire over time, the number of non-renewals and “sweet deals” is sure to increase. The picture for Chicago appears to be even more desperate. Crain’s Chicago Business reports that increased commercial vacancies, while “good news for those hunting for workspace …[are] a signal that broader financial carnage is approaching for local office landlords, as is a massive reset of downtown property values.”

Tough times ahead for City Hall

The decline in commercial property values could signal tough times for City Halls too. In the 8 cities studied, commercial real estate accounts directly for 10% of total revenues, ranging from 5% in Los Angeles, to 17% in Atlanta. Despite strong economic growth, Atlanta GA and Austin TX, with high commercial property shares and over-dependence on the property tax, face revenue losses that equal or exceed the expected losses in New York and San Francisco.

Revenue losses from declining property values are unlikely to fully materialize until 2023 or later, given typical reassessment cycles for commercial property. While rising home values, and (in some cities) inflation-related increases in sales tax revenues will help in the short term, there are legally binding limits on the extent to which cities can raise residential property tax rates to make up the losses from commercial property over the longer term. In the meantime, pressure on commercial property values will surely grow, as more leases expire over the next few years.

Plugging the gap

What can cities do to mitigate their losses and the pressure on public services? On the revenue side, short-term fiscal relief from the feds has been crucial. But as the money runs out, cities will have to look to longer-term solutions. Revenue diversification is one important avenue – NYC was “saved” from predicted fiscal crisis during the pandemic because it has a local income and sales tax, and revenues from both taxes soared 2021. Cities that are overly reliant on property tax – e.g., Atlanta, Austin, and Miami – will need to gain access to other types of taxes and greater state aid. At the same time, local public transit systems, already on life-support in denser cities, due to sharp decreases in ridership, will be competing with city governments for greater state aid.

On the spending side, even with the offsets mentioned above, a weaker tax base will of necessity lead to belt-tightening. To spare or not to spare police spending? How to address the homeless problem with fewer resources? These fights – never pretty – are likely to be particularly acrimonious in the post-COVID world.

[1] If former commuters work remotely and live outside the city, cities that levy local income taxes, (e.g.  Dayton Ohio), could lose significant amounts of revenue.  See

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Howard Chernick is Professor Emeritus, Dept of Economics, Hunter College and the Graduate Center, the City University of New York. He is a research affiliate of the Institute for Research on Poverty at the Univ. of Wisconsin, and a board member of Institute for Taxation and Economic Policy He has been a visiting professor at the University of Rennes I, France, the School of Public and International Affairs, Princeton University, and the New School. In 2015 received a Fulbright specialist grant at the Ecole Nationale Superieure Cachan, France. Selected publications include "Fiscal Effects of Block Grants for the Needy: An Interpretation of the Evidence" (1998); “On the Determinants of Sub-National Tax Progressivity in the U.S.” (2005); “State and Local Fiscal progressivity: Consequences for Economic Growth.” (2010); "The Impact of the Great Recession and the Housing Crisis on the Financing of America's Largest Cities.” (2011) The Fiscal Effects of the Covid-19 Pandemic on Cities: An Initial Assessment (2020). He is the editor of "Resilient City: The Economic Impact of the 9/11 Attack on NYC." (Russell Sage, 2005).