Experts are worried that the downturn in the commercial real estate market in California could leave local governments lacking the funds they need to pay for schools, roads and other public services. In San Francisco, the struggling office market could reduce property tax revenues by as much as $200 million by 2028. A recent report from Moody’s Analytics revealed that office vacancy rates in the United States rose to 19.6% by the end of 2023. Offices have not been that empty in America since 1979.
Plummeting tax revenues
Some large American cities are even more reliant on commercial real estate property taxes than San Francisco. Taxes on offices and other commercial properties account for 36% of city revenue in Boston and 20% of property tax revenue in New York. Surging vacancy rates and falling commercial real estate values are predicted to lower property tax revenue in New York by $1.1 billion in the 2027 fiscal year. This could leave city officials desperately short of cash and lead to drastic cuts in essential public services.
Spillover effects
Vacant offices do more than reduce property tax revenues. They also affect shops, restaurants and other businesses that rely on the money spent by office workers. These spillover effects and the impact they have on city office districts has been named the “urban doom loop” by real estate experts. The downturn
In the commercial property sector could also reduce the value of pension funds and 401(k) accounts. In 2023, the California Public Employees Retirement System reported a negative return on its real estate portfolio. This is concerning because CalPERS is the nation’s largest government sector pension fund.
Work-from-home arrangements
The increasing popularity of work-from-home arrangements has led to a sharp rise in office vacancies. This means property tax revenues from commercial real estate will likely plummet in many of America’s largest and most important cities in the years ahead. The rise in office vacancy rates will also impact business that rely on the money office workers spend. Experts call this the “urban doom loop,” and there does not seem to be any solution in sight.