In San Francisco, a 20-story office tower that sold for $146 million a decade ago was listed in December for just $80 million.
In Chicago, a 200,000-square-foot-office building in the city’s Clybourn Corridor that sold in 2004 for nearly $90 million was purchased last month for $20 million, a 78 percent markdown.
And in Washington, a 12-story building that mixes office and retail space three blocks from the White House that sold for $100 million in 2018 recently went for just $36 million.
Such steep discounts have become normal for office space across the United States as the pandemic trends of hybrid and remote work have persisted, hollowing out urban centers that were once bustling with workers. But the losses are hitting more than just commercial real estate investors. Cities are also starting to bear the brunt, as municipal budgets that rely on taxes associated with valuable commercial property are now facing shortfalls and contemplating cutbacks as lower assessments of property values reduce tax bills.
“They’re being sold at massive discounts,” Aaron Peskin, president of the San Francisco board of supervisors, said of office buildings in his city. “If you were the folks who bought at the top of the market, you’re taking a huge haircut.”
Mr. Peskin said that San Francisco’s $14 billion budget is facing the prospect of a $1 billion shortfall over the next few years, in part because of lost commercial real estate tax revenue.
“In the short term, it means less money in municipal coffers and a less robust downtown,” he said.
Since the pandemic, cities across the country have benefited from an economic rebound and an infusion of billions of dollars in federal relief money that was disbursed through the American Rescue Plan of 2021. That left municipalities so flush with cash that they were giving city workers raises, refurbishing local basketball and tennis courts and upgrading sewage systems.
But now budgets are starting to tighten.
A fiscal report published by the National League of Cities last year found that optimism among municipal finance officials has started to wane amid concerns of weaker sales and lower property taxes coinciding with the expiration of federal funds.
Cutbacks could lead to what Arpit Gupta, a professor at the New York University Stern School of Business, has described as an “urban doom loop” across the United States.
In a research paper that was updated late last year, Mr. Gupta and his colleagues estimated that the national office market lost $664.1 billion in value from 2019 to 2022. To fill the budget holes created by the lost tax revenue, they posited that cities could cut services or raise other kinds of taxes. But that would come with its own downsides, including prompting businesses and residents to leave, exacerbating the problem by further eroding the tax base.
Mr. Gupta compared the dynamic to the conundrum that rust belt cities experienced in the 1960s and ’70s when manufacturers shuttered and local governments struggled to balance their budgets.
“Some cities that tried to raise taxes and cut back on public services found that those responses accelerated the process of urban flight,” he said. “It sort of compounded itself.”
The stress bearing down on the commercial real estate sector has been evident since the pandemic accelerated the trend of remote work. That has been complicated by high interest rates, which have made refinancing expensive, and stress in the banking sector, which is holding about $3 trillion of outstanding commercial real estate debt.
In Chicago, a 200,000-square-foot-office building in the city’s Clybourn Corridor that sold in 2004 for nearly $90 million was purchased last month for $20 million, a 78 percent markdown.
And in Washington, a 12-story building that mixes office and retail space three blocks from the White House that sold for $100 million in 2018 recently went for just $36 million.
Such steep discounts have become normal for office space across the United States as the pandemic trends of hybrid and remote work have persisted, hollowing out urban centers that were once bustling with workers. But the losses are hitting more than just commercial real estate investors. Cities are also starting to bear the brunt, as municipal budgets that rely on taxes associated with valuable commercial property are now facing shortfalls and contemplating cutbacks as lower assessments of property values reduce tax bills.
“They’re being sold at massive discounts,” Aaron Peskin, president of the San Francisco board of supervisors, said of office buildings in his city. “If you were the folks who bought at the top of the market, you’re taking a huge haircut.”
Mr. Peskin said that San Francisco’s $14 billion budget is facing the prospect of a $1 billion shortfall over the next few years, in part because of lost commercial real estate tax revenue.
“In the short term, it means less money in municipal coffers and a less robust downtown,” he said.
Since the pandemic, cities across the country have benefited from an economic rebound and an infusion of billions of dollars in federal relief money that was disbursed through the American Rescue Plan of 2021. That left municipalities so flush with cash that they were giving city workers raises, refurbishing local basketball and tennis courts and upgrading sewage systems.
But now budgets are starting to tighten.
A fiscal report published by the National League of Cities last year found that optimism among municipal finance officials has started to wane amid concerns of weaker sales and lower property taxes coinciding with the expiration of federal funds.
Cutbacks could lead to what Arpit Gupta, a professor at the New York University Stern School of Business, has described as an “urban doom loop” across the United States.
In a research paper that was updated late last year, Mr. Gupta and his colleagues estimated that the national office market lost $664.1 billion in value from 2019 to 2022. To fill the budget holes created by the lost tax revenue, they posited that cities could cut services or raise other kinds of taxes. But that would come with its own downsides, including prompting businesses and residents to leave, exacerbating the problem by further eroding the tax base.
Mr. Gupta compared the dynamic to the conundrum that rust belt cities experienced in the 1960s and ’70s when manufacturers shuttered and local governments struggled to balance their budgets.
“Some cities that tried to raise taxes and cut back on public services found that those responses accelerated the process of urban flight,” he said. “It sort of compounded itself.”
The stress bearing down on the commercial real estate sector has been evident since the pandemic accelerated the trend of remote work. That has been complicated by high interest rates, which have made refinancing expensive, and stress in the banking sector, which is holding about $3 trillion of outstanding commercial real estate debt.
