Office Vacancy Rates Remain Steady as Workers Stay Home

Office vacancy rates in major US metropolitan areas have reached a new high of 53% as of January 2024, according to Kastle Systems, a security firm. Despite efforts by companies to enforce return-to-office policies, employees continue to resist going back to the workplace. This hesitation has significant implications for the commercial real estate market, but cities are not too concerned at the moment.

Unlike other revenue sources, commercial real estate is not a major contributor to general fund revenues for most local governments. Michael Rinaldi, head of US local governments at Fitch Ratings, explains that declines in commercial real estate can be managed through careful expenditure management and stability in other revenue sources, such as residential property taxes and sales tax.

The property tax, which is heavily dependent on a property’s assessed valuation, remains the backbone of municipal finance. As vacancy rates affect assessed valuations, a decline in commercial real estate can potentially result in decreased tax revenue. However, the extent of these declines varies from city to city, and their impact will largely depend on each municipality’s response.

While large central business districts may experience more pressure, Rinaldi believes that the full impact of commercial real estate valuation declines on tax revenues will be phased in over several years. This gives cities time to develop contingency plans and adapt to the changing circumstances. Scott Nees, director and lead analyst at S&P Global Ratings, adds that most cities will undergo a “tax-shifting” process, where residential and other commercial properties shoulder a larger share of the tax burden as office properties decline.

Overall, major cities are expected to maintain a stable credit picture in the coming years, although risks may continue to amplify. The real estate market will gradually adapt to the changing dynamics of remote work, and municipalities will seek alternative sources of revenue to compensate for the decline in office occupancy.

FAQ:

1. What is the current office vacancy rate in major US metropolitan areas?
The current office vacancy rate in major US metropolitan areas is 53% as of January 2024.

2. Who reported the office vacancy rate?
The office vacancy rate was reported by Kastle Systems, a security firm.

3. Are employees willing to return to the workplace?
No, despite efforts by companies to enforce return-to-office policies, employees are resisting going back to the workplace.

4. What are the implications of employee resistance for the commercial real estate market?
Employee resistance to returning to the workplace has significant implications for the commercial real estate market.

5. Are cities concerned about the current situation?
No, cities are not too concerned about the current situation regarding employee resistance and its impact on the commercial real estate market.

6. How do declines in commercial real estate impact local governments?
Declines in commercial real estate can be managed through careful expenditure management and stability in other revenue sources for most local governments.

7. What are the main revenue sources for local governments?
The main revenue sources for local governments include residential property taxes and sales tax.

8. What is the significance of property tax for municipal finance?
Property tax, which is dependent on a property’s assessed valuation, is the backbone of municipal finance.

9. How do vacancy rates in commercial real estate affect assessed valuations?
Vacancy rates in commercial real estate can potentially result in decreased tax revenue as they impact assessed valuations.

10. Will the impact of commercial real estate valuation declines on tax revenues be immediate?
No, the full impact of commercial real estate valuation declines on tax revenues will be phased in over several years.

11. How will cities respond to the decline in office properties?
Most cities will undergo a “tax-shifting” process where residential and other commercial properties shoulder a larger share of the tax burden as office properties decline.

12. Are major cities expected to maintain a stable credit picture?
Yes, overall major cities are expected to maintain a stable credit picture in the coming years.

Related Links:
Kastle Systems
Fitch Ratings
S&P Global Ratings