Remote workers have moved out of city centers. Now investors are following them.

Real estate trusts focused on investment in downtown areas are trading at less than half their pre-COVID levels, The Wall Street Journal reported. Lenders are demanding extra interest to make loans against office buildings; bonds to support New York City’s bus and subway system have a hard time finding buyers.

Until 2020, commuters supported an economic ecosystem that knitted together office buildings, restaurants and retailers, a range of service businesses, transportation networks, and brought in enough tax dollars to support city governments and their lenders and bondholders.

The shift to remote work snatched away the foundation of that ecosystem, with offices now only 50-percent occupied compared to 2019, according to security firm Kastle Systems, which monitors swipe card data in more than 2,000 office buildings.

Public transit systems are seeing only a third as many riders as before COVID, according to federal data.

Office building owners have slashed rents to hold or attract tenants while having to pay costs rising with inflation. Without the usual volume of daily commuters, businesses closed or scaled back staff and hours. With less income to businesses and property owners, cities collect fewer taxes.

We have documented this groundshift in urban economic structures in our ongoing series Top Trend 2023: Office Building Bust, which has included stories such as:

● “Commercial Real Estate in a Tailspin” (20 Oct 2020)

● “Deloitte Abandons More London Office Space” (26 Apr 2022)

● “GM Softens Back-to-the-Office Requirement After Worker Backlash” (4 Oct 2022)

● “Business Office Bust Begins to Bite” (20 Dec 2022)

● “New York City’s Workforce Sharply Shrinking” (24 Jan 2023)

● “Office Occupancy Half of What It Used to Be” (7 Feb 2023)

“The Commercial Real Estate Face-Off” (28 Mar 2023)

“Price of Hedging Interest Rates Wallops Office Landlords” (9 May 2023)

“You could see this as a slow-motion change or the beginning of a slow-moving train wreck,” Richard Ciccarone, past president of Merritt Research Services, which analyzes cities’ credit. “I hope it’s not a train wreck but it could be.”

The quality of urban life already is deteriorating, with tourists and residents citing empty storefronts and bus stops that have become camps for persons with mental illness, the WSJ said, adding that New York City is staring into a $7-billion budget hole by 2027.

Federal aid helped cities limp through 2020 and 2021 but most of that money has been spent. Meanwhile, cities are on their own to deal with rising costs, worker shortages, and skimpier revenues. 

A rising number of requests by office building owners to reduce their assessed property values and, therefore, their property taxes is a particular worry, warned money manager Asset Preservation Advisors.

Those challenges could cut the city of San Francisco’s current $3-billion annual revenues by as much as $200 million in the next five years, the company estimated.

TREND FORECAST: Early in the COVID War, in articles such as “Real Estate’s Reality” (7 Jul 2020), we warned that demand for office space would crash and never fully return. Events have long since proven our prediction correct.

We also have accurately forecast the resulting financial damage to cities, warning of it in articles including “New York Office Vacancies Set Record”(13 Jul 2021) “Mass Expiration of Office Leases Threatens Landlords” (26 Apr 2022), and “‘Dimming Hope’ That Pre-COVID Demand for Office Space Will Return” (22 Nov 2022).

TREND FORECAST: Thousands of office buildings, especially older ones, across the U.S., are doomed. 

Some may be converted to apartments, but only those accidentally suited to financially feasible conversion. Most are not suited, for reasons we explained in “Plan to Turn New York’s Vacant Hotels To Housing Not Working” (5 Apr 2022) and “Wall Street, Dead Street. Office Buildings Going Condo” (28 Jun 2022).

Landlords will be stuck holding many buildings, even newer ones, unable to pay their way. Eventually, the owners will default on their taxes or mortgages. 

As we have often noted, cities are at the bottom of this pile of financial wreckage. 

Municipalities will lose a significant share of their property tax base, which makes up at least 40 percent, and often the majority, of cities’ revenues.

Cities may reclaim some of these buildings for back taxes and foot the exorbitant bill for reconditioning them as low-income housing or shelters for homeless persons.

Ultimately, cities will wind up owning portfolios of empty office buildings that no one can afford to keep up.

At that point, much of the remaining properties will be sold for cheap, relatively speaking, and buildings will be demolished to prepare the sites for new lives in a new economy.

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