How office vacancies depreciate SJ's real estate while driving up City taxes

Athena Thorne of PJ Media connects the dots between San Jose's unused office space glut, the City budget (which must then compensate for lower property/retail tax revenue), and folks pulling out of commercial real estate investments. Meanwhile, experts wonder if—in a post-Covid work culture—we should instead relax planning regulations and start converting offices to homeless housing units.

An article in The Atlantic last month called “The Next Crisis Will Start With Empty Office Buildings” paints a grim picture of what’s going down. First, the demand for office space dries up:

During the first three months of 2023, U.S. office vacancy topped 20 percent for the first time in decades. In San Francisco, Dallas, and Houston, vacancy rates are as high as 25 percent. These figures understate the severity of the crisis because they only cover spaces that are no longer leased. Most office leases were signed before the pandemic and have yet to come up for renewal. Actual office use points to a further decrease in demand. Attendance in the 10 largest business districts is still below 50 percent of its pre-COVID level, as white-collar employees spend an estimated 28 percent of their workdays at home.

With a third of all office leases expiring by 2026, we can expect higher vacancies, significantly lower rents, or both.

Next, the loss of commercial tenants and landlords causes urban fiscal pain:

Property taxes underpin city budgets. In New York City, such taxes generate approximately 40 percent of revenue. Commercial property—mostly offices—contributes about 40 percent of these taxes, or 16 percent of the city’s total tax revenue. In San Francisco, property taxes contribute a lower share, but offices and retail appear to be in an even worse state.

Empty offices also contribute to lower retail sales and public-transport usage. In New York City, weekday subway trips are 65 percent of their 2019 level—though they’re trending up—and public- transport revenue has declined by $2.4 billion. Meanwhile, more than 40,000 retail-sector jobs lost since 2019 have yet to return. A recent study by an NYU professor named Arpit Gupta and others estimate a 6.5 percent “fiscal hole” in the city’s budget due to declining office and retail valuations. Such a hole “would need to be plugged by raising tax rates or cutting government spending.”

This article originally appeared in PJ Media. Read the whole thing here.

Read more on potential solutions to SJ’s office space glut here.

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