Category: Workplace Return

The expansion of remote work in Washington, DC has dramatically reduced tax revenue from office buildings, which poses “a serious long-term risk to the District’s economy and its tax base,” according to a Feb. 28 revenue estimate from the city’s CFO Glen Lee. (Washington Post, March 1)

$464M Revenue Drop

• DC’s tax revenue is projected to plunge nearly a half-billion dollars from 2024-2026 due to remote work’s influence, reduced office transactions, and dropping asset values. (BisNow and DCist, March 1)
• The quarterly report notes that tax revenue from District commercial properties —particularly large office buildings valued over $50 million—significantly declined in the past fiscal year and was the main reason for a reduction in overall real property tax revenue in FY 2022.
• The city’s forecast, according to Lee’s letter to District Mayor Muriel Bowser and Council Chairman Phil Mendelson, has also been “revised downward by $81 million in FY 2024, $183 million in FY 2025, and by approximately $200 million in FY 2026.”
• The report states that although real property revenue from hotels, restaurants and retail properties is expected to continue on a path of recovery, “this growth is expected to be more than offset by a deeper loss in tax revenue from office properties.”

The Roundtable View

• Mayor Bowser this week stated, “With the ongoing impacts of telework and national political uncertainties, we face another significant test to our local economy.” (Bowser Statement, Feb. 28)
• In January, Bowser reiterated views expressed by The Real Estate Roundtable to President Biden the previous month about the need to get more federal workers back to the workplace and convert underutilized commercial real estate spaces into affordable housing. (Roundtable Weekly, Jan. 6)

• The letter from Real Estate Roundtable Chair John Fish, above right, (SUFFOLK Chairman & CEO) and President & CEO Jeff DeBoer, left, also urged Biden “to direct federal agencies to enhance their consideration of the impact of agency employee remote working on communities, surrounding small employers, transit systems, local tax bases and other important considerations.” (Roundtable letter, Dec. 12, 2022)
• City officials in New York, Washington, Chicago, Houston, San Francisco, and Boston have also recently encouraged city workers to return to their downtown offices. (Wall Street Journal, Jan. 24)

Economic Consequences

• The DC revenue forecast also warned, “The population decline observed during the pandemic, coupled with the increasing prevalence of remote work, may lead to demographic shifts and economic repercussions. With fewer commuters, there may be less demand for public transportation and office space, leading to a potential reduction in real estate prices. Policymakers will need to carefully monitor and respond to these changes.”
• Separately, The Wall Street Journal reported on Feb. 28 that return-to-office rates in Paris and Tokyo have climbed to over 75%, while U.S. office occupancy stands at about half of prepandemic levels, depending on the city. (WSJ, “As Americans Work From Home, Europeans and Asians Head Back to the Office”)

The consequences of remote work on CRE—and potential policy solutions—will continue to be a focus of The Roundtable.

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The profound impact of remote work on the office sector—and the resulting negative consequences for municipal tax revenues—were the focus of reports this week on current marketplace pressures and long-term office forecasts.

Office Vacancy

• A weak return-to-office rate for employees working under hybrid arrangements, combined with rising interest rates and asset value pressures, have led to increased office vacancy rates and loan defaults in many cities, according to a Feb. 21 Wall Street Journal report.
• Roundtable Board Member Scott Rechler (Chairman & CEO, RXR) is quoted by the Journal on how the office sector may eventually emerge from the current cycle. “There’s a transition period that takes time. You have to cross the chasm into the new regime,” Rechler said. (WSJ, “Office Landlord Defaults Are Escalating as Lenders Brace for More Distress”)
• A Feb. 22 Cushman & Wakefield report forecasts that the overall level of office vacancy by 2030 will be 55% higher than prior to the pandemic (Q4 2019)—a trend that could be countered by repositioning and repurposing current space usage in coordination with public-private efforts at the local, state, and federal levels. (C&W’s “Obsolesence Equals Opportunity” and Fortune, Feb. 22)
• The report also states that as much as 25% of all U.S. office space is “growing increasingly undesirable and will need to be reimagined and made relevant for the future,”—and that approximately 60% of all current office stock is “facing competitive obsolescence.” (BisNow, Feb. 23)
• The Cushman & Wakefield report concludes, “Eventually, the remote working dynamic will flow completely through the marketplace as pre-pandemic leases expire and as firms shed the space to meet new-era, hybrid work requirements.”

The Roundtable View

• The Real Estate Roundtable’s Q1 Economic Sentiment Index released last week shows that Class B office properties are struggling, asset values have fallen year-over-year, and availability of debt and equity capital have declined.
• Roundtable President and CEO Jeffrey DeBoer, above, said, “Fundamentally, our Q1 index illustrates that the trends accelerated by the pandemic have led to mixed performances across asset classes. In the office sector, remote work policies, concerns over crime and transportation are driving record-high vacancy rates throughout the country, hurting city budgets and small businesses.” (Roundtable news release, Feb. 17)
• DeBoer added, “Policymakers should emphasize the need to return to the workplace while considering other innovative solutions such as legislation to convert underutilized offices to housing.” (Roundtable Weekly, Feb. 17)
• DeBoer and Roundtable Chairman John Fish (Chairman & CEO, SUFFOLK) submitted comments last Dec. to President Biden encouraging support for legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” (Roundtable Weekly, Dec. 16, 2022)
• The Roundtable’s letter to Biden emphasized that work-from-home policies are damaging the economy, cities, and communities. “We are concerned that certain Administration policy guidance is encouraging federal agencies to adopt permanent work-from-home policies for federal employees and thereby actually magnifying negative economic and social consequences for cities,” the letter stated. 

Tax Incentives & Remote Work

• Private companies may be motivated to enforce stronger employee return-to-office policies if they wish to qualify for city and state tax incentive agreements.
• Provisions built into some existing municipality agreements were designed to ensure that private sector jobs would boost local revenue from income, sales and property taxes, and bolster downtown economies. (Bloomberg, Feb. 21) 

The Bloomberg report offers several examples of how state and city officials are reevaluating current incentive agreements and designing new ones that detail the scope of employee location requirements for companies to qualify for tax breaks.

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The House of Representatives passed legislation this week requiring all federal agencies to revert to pre-pandemic telework office arrangements and allow employees 30 days to return to their offices. (GovExec, Feb. 1 and The Hill, Feb. 2)

SHOW UP Act

• House Oversight Committee Chairman James Comer (R-KY)—the lead sponsor of the Stopping Home Office Work’s Unproductive Problems (SHOW UP) Act—said it is urgent that federal employees get back to their offices. (Video of Comer’s House floor statement and news release, Feb. 1).
• Rep. Comer also noted that the cost of federal leases in Washington, D.C. is also motivating return-to-office calls for government employees. “If we’re not going to use those buildings for federal workers, then the federal government may look at doing something different with those buildings.” (Federal News Network, Jan. 30 and Roundtable Weekly, Jan. 6)
• CoStar’s reporting on the bill’s passage noted The Real Estate Roundtable’s December letter to President Biden, which cited the negative impact of underutilized office space on local communities. (CoStar, Feb. 2 and Roundtable letter, Dec. 12)
• The Roundtable comments also encouraged President Biden to support legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” (Roundtable Weekly, Dec. 16)

Office-to-Apartment Conversions

• Meanwhile, New York City Mayor Eric Adams plans to encourage the conversion of aging office buildings to apartments by changing zoning restrictions that limit adaptive uses of CRE in a specific swath of Manhattan. (GlobeSt, Jan. 30)
• Mayor Adams’ efforts to convert outdated office space to other potential uses, especially housing, are based on a recent task force report, the New York City Office Adaptive Reuse Study. 

What’s Next

• The Democrat-controlled Senate is unlikely to take action on the House-approved SHOW UP Act. (PoliticoPro, Feb. 1)

• Meanwhile, the White House announced this week that COVID-19 emergency declarations will end on May 11. It is unclear how the federal government’s pandemic response shift will impact remote work arrangements for government and private sector employees. (Forbes, Jan. 31 and White House Statement of Administrative Policy, Jan. 30)

The Roundtable will continue to focus on return-to-office policies as part of its 2023 policy agenda as remote work continues to take an economic toll on cities and tax bases throughout the nation.

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The ongoing negative economic impact of remote work was featured in the Wall Street Journal this week—supported by a private sector study showing more uncertainty lay ahead as office markets adjust to post-pandemic hybrid arrangements for employees. (WSJ, Jan. 24 and CommercialEdge, Jan. 19)

Threats to Local Tax Bases

• Real Estate Roundtable Chair John Fish and President & CEO Jeff DeBoer wrote to President Biden last month about the consequences of federal agencies’ promotion of permanent remote work—and how these actions are harming cities, local tax bases, and small businesses. (Roundtable letter, Dec. 12, 2022)
• The Roundtable letter also expressed support for legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.”
• The WSJ article this week cited The Roundtable’s letter as well as District of Columbia Mayor Muriel Bowser’s  recent calls for President Biden to get more federal workers back to the workplace—and convert underutilized commercial real estate spaces into affordable housing. (Roundtable Weekly, Jan. 6 and ABC News, Jan. 2)
• City officials in New York, Washington, Chicago, Houston, San Francisco, and Boston have also encouraged city workers to return to their downtown offices. (WSJ, Jan. 24)

Uncertainty Ahead

• Yardi’s CommercialEdge issued its National Office Report this month showing that the U.S. office market closed 2022 with a consistent rise in vacancies & declining sales. The national analysis shows that some firms have become more forceful in bringing workers back into the office, while many have fully committed to hybrid and remote work policies. The report also notes that tenants will likely embrace smaller office footprints in premium locations.
• CommercialEdge stated, “With offices vacant and housing in short supply across the county, converting offices seems like a logical solution.” Yet without tax incentives and other financial resources from state and local governments, many office conversion projects may not be a priority in a high-interest-rate environment, according to the report.
• A VTS Office Demand Index (VODI) report shows that, while there is momentum in return-to-office trends, it “seems unlikely” that most employers will revert to pre-pandemic physical workplace arrangements. (GlobeSt, Jan. 26)
• The real estate industry’s perspective on the major repercussions of remote work, including its threat to municipal tax bases throughout the country, were also the focus of recent articles in GlobeSt on Jan. 26 and Jan. 23.

Return-to-office policies by the federal government and cities throughout the nation—and solutions to ease hybrid work’s damaging consequences—will continue to be a focus of The Roundtable’s policy agenda in 2023.

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As the pandemic-induced rise of remote work has lowered office demand and occupancy rates, building repurposing projects are on the rise—and the nation’s mayors are exploring ways to revitalize their downtowns and damaged tax bases. (Commercial Property Executive, Jan. 16 | CBRE Research, Dec. 2 | New York magazine, Dec. 29)

Growing Threat to Municipal Tax Bases

• The president of the U.S. Conference of Mayors, Miami Mayor Francis Xavier Suarez, above, will discuss the issue of how cities are responding to the economic impact of hybrid work arrangements during The Real Estate Roundtable’s Jan. 24 business meeting in Washington.

• This week’s National Conference of Mayors Winter Meeting included a session on “Bringing Life Back to Downtown: Opportunities for Office Conversions” with the Mayors of Hartford, Pittsburgh and Birmingham.  

• Additionally, members of the Ohio Mayors Alliance, a bipartisan group of mayors representing the state’s 30 largest cities, recently issued a report that identified remote work’s economic threat to municipal revenue as among their top concerns for 2023. (Dayton Daily News, Dec. 19)
• A Jan. 19 editorial in the Washington Post focuses on the national problem of hybrid work for downtown areas and suggests paths to recovery, including the need to speed up permitting, rezoning and easing of restrictions. “Cities must adapt to this new reality or risk a downward spiral of falling commercial property values, lower taxes on those buildings and ghost downtowns that could lead to increased crime and homelessness,” the editorial states.
• Employees working full-paid days from home increased to about 30 percent from 5 percent before the pandemic, according to a July 21 panel on “Vulnerable Cities Facing Work from Home Realities” from the Volcker Alliance and the Penn Institute for Urban Research.

Federal Agencies & Remote Work

• Federal government employees were recently urged to return to their agency offices by Washington, D.C. Mayor Muriel Bowser, who called on President Biden to urge more federal workers back to the workplace and convert underutilized commercial real estate spaces into affordable housing. (Roundtable Weekly, Jan. 6)

• Mayor Bowser’s views reiterated a letter sent on Dec. 12 by The Roundtable to President Joe Biden about the ongoing, harmful economic impacts of widespread remote work on cities, local tax bases, and small businesses—and how work-from-home policies by federal agencies threaten to magnify these negative economic and social consequences. (Roundtable letter | GlobeSt and CoStar, Dec. 15) 

• Legislation introduced in the House of Representatives last week would require all federal agencies to revert to pre-pandemic office arrangements that were in effect on December 31, 2019 and give employees 30 days to return to their offices. [Roundtable Weekly, Jan. 13 and Bill text of the SHOW UP Act (H.R. 139)]
• Any federal order to mandate government workers back to their offices could be complicated by federal worker labor unions, which support flexible hybrid arrangements. (GlobeSt, Jan. 17 and (TechTarget,  Jan. 12)

Meanwhile, the Federal Reserve released its “Beige Book” this week, which reports on national economic conditions. The report stated, “Commercial real estate activity slowed slightly, on average, with more notable weakening in the office market.” Additionally, some bankers reported to the Fed that higher borrowing costs had begun to dampen commercial lending. (Beige Book national summary, Jan. 18 and GlobeSt, Jan. 20)

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Legislation introduced in the House this week would require all federal agencies to revert to pre-pandemic office arrangements that were in effect on December 31, 2019 and give employees 30 days to return to their offices. The bill, if enacted, would also require the Biden administration to provide Congress with a plan to mitigate the negative impacts of remote work and report on agencies’ plans for federal property leases. [Bill text of (H.R. 139)]

SHOW UP Act

• The Stopping Home Office Work’s Unproductive Problems (SHOW UP) Act—introduced this week by House Committee on Oversight and Accountability Chairman James Comer (R-KY)—reflects the views recently expressed by The Real Estate Roundtable to President Joe Biden about the importance of getting more federal workers back to the workplace. (GlobeSt, Jan. 13  and Roundtable letter, Dec. 12, 2022)
• The Dec. 12, 2022 letter from Roundtable Chair John Fish and President & CEO Jeff DeBoer urged the administration to consider the consequences of federal agencies’ promotion of permanent remote work—and how it magnifies ongoing, harmful economic impacts on cities, local tax bases, and small businesses. The Roundtable letter also noted how agencies should consider how hybrid work arrangements directly affect governmental service delivery and labor productivity. (Roundtable Weekly, Dec. 2 and Dec. 16, 2022)
• The SHOW UP Act would also require the administration to report to Congress on how pandemic-era telework levels affected agencies’ missions, along with federal property lease plans. (Federal News Network, Jan. 11)
• Similar legislation was introduced in the last Congress by former Rep. Yvette Herrell (R-NM) to address how expanded, pandemic-era telework arrangements negatively impacted agencies’ missions. (One-page backgrounder and Federal News Network, May 20, 2022)

Federal Agencies’ Leases

• Washington, D.C. Mayor Muriel Bowser also recently called on President Biden to get more federal workers back to the workplace and convert underutilized commercial real estate spaces into affordable housing. (Roundtable Weekly, Jan. 6)
• President Biden commented on federal return-to-the-workplace efforts in his March 2022 State of the Union address, above. “It’s time for America to get back to work and fill our great downtowns again with people. People working from home can feel safe and begin to return to their offices. We’re doing that here in the federal government. The vast majority of federal workers will once again work in person,” Biden said. (White House transcript, March 1, 2022)
• A General Accounting Office (GAO) survey last year reported that 24 federal agencies planned to reduce their leased space. Sixteen agencies surveyed said they would reduce the number of leases and 19 planned to reduce square footage over the next three years. (GlobeSt, Sept. 15, 2022 and GAO Report, Sep. 7, 2022)
• The GAO survey noted that “… in a post-COVID-19 environment agencies are likely to significantly reduce their demand for federal real estate due to changes to telework and remote policies.” A footnote in the report added, “GSA leases typically have a date after which GSA can terminate the lease with as little as 90 days’ notice.” (Full GAO report)

In addition to the Washington, DC region, cities throughout the nation are responding to the impact of hybrid work arrangements on local communities and tax bases. Roundtable members will hear about this significant issue during our Jan. 24 State of the Industry Meeting in Washington from Miami Mayor Francis Xavier Suarez, who also serves as president of the U.S. Conference of Mayors.

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Washington, DC Mayor Muriel Browser this week reiterated views expressed by The Real Estate Roundtable to President Biden about getting more federal workers back to the workplace and converting underutilized commercial real estate spaces into affordable housing. (ABC News, Jan. 2 and Roundtable letter, Dec. 12, 2022)

Federal Employees & Remote Work

• “The federal government represents one-quarter of D.C.’s prepandemic jobs and owns or leases one-third of D.C.’s office space,” Bowser, above, said in her third inaugural address on Jan. 2. “We need decisive action by the White House to either get most federal workers back to the office most of the time, or to realign their vast property holdings for use by the local government, by nonprofits, by businesses and by any user willing to revitalize it.” She added that converting office space into housing is the key to unlocking the potential of a reimagined, more vibrant downtown. (MarketWatch, Jan. 4)
• Prominent DC office landlords sent a letter on Nov. 28 to the District’s chief financial officer about eroding local market conditions, including increased vacancy rates, lackluster leasing activity, equity flight, and a financing drought—especially for assets with high levels of vacancy. The landlords warned that DC may face a significant loss of tax revenue that could threaten the city’s fiscal health, and that other cities are experiencing similar conditions. (Commercial Observer, Nov. 29 and Bisnow, Nov. 28)     

• A recent federal employee survey from the U.S. Office of Personnel Management reports that about 42% of federal employees “telework” at least a few days per week.
• The federal government maintains facilities in 2,200 communities, influencing local leasing activities, property values, and surrounding small businesses. (Roundtable Weekly, Dec. 16, 2022)

• Federal proposals aimed at encouraging more Americans back to the workplace, including enhanced child- care and eldercare benefits, are under consideration as the administration formulates its 2023 economic agenda. (Wall Street Journal and The Hill, Dec. 20)

Roundtable View

• Real Estate Roundtable Chair John Fish, above right, and President & CEO Jeff DeBoer, left, wrote to President Biden last month about the consequences of federal agencies’ promotion of permanent remote work—and how remote work magnifies the ongoing, harmful economic impacts on cities, local tax bases, and small businesses. (Roundtable Weekly, Dec. 2 and Dec. 16, 2022)
• Roundtable Chair John Fish also recently responded to plans by the state of Massachusetts to vacate at least 355,000 square feet of its office footprint. Fish told The Boston Globe on Dec. 27 that government agencies at all levels should consider the effects on small businesses and property taxes when evaluating their back-to-office policies.
• The Roundtable comments also expressed supported legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” The letter stated that incentives for conversion projects could be modeled on the rehabilitation tax credit as a cost-effective means to increase the housing supply, create jobs, and boost the local tax base.

How cities are responding to the impact to hybrid work arrangements will be one of several topics that Miami Mayor Francis Xavier Suarez, who also serves as president of the U.S. Conference of Mayors will discuss with Roundtable members at our Jan. 24 State of the Industry Meeting in Washington.

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This week, rising U.S. office vacancy rates were the focus of several media reports as a result of the ongoing, negative impact of hybrid work arrangements. 

• On Dec. 20, CNBC’s Squawkbox reported that 100 million square feet of office space is now available in Manhattan.
• On Dec. 18, The Real Deal reported on The Roundtable’s recent letter to President Joe Biden about the harmful economic and social consequences of widespread remote work on cities, local tax bases, and small businesses.
• The article included a quote from Real Estate Roundtable Chairman and SUFFOLK CEO John Fish and The Roundtable’s President and CEO Jeffrey DeBoer, who stated in their letter, “We are concerned that certain administration policy guidance is encouraging federal agencies to adopt permanent work-from-home policies for federal employees and thereby actually magnifying negative economic and social consequences for cities.” (Roundtable Weekly, Dec. 16)
• On Dec. 17, the New York Times reported on office vacancy rates in San Francisco. “Office buildings are at about 40 percent of their prepandemic occupancy, while the vacancy rate has jumped to 24 percent from 5 percent since 2019,” according to the article, “What Comes Next for San Francisco’s Emptied Downtown.”

Commercial real estate trends and potential policy responses will be discussed during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington, DC.

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