City Centers Bouncing Back, Lifting Property Taxes and Other Revenues

As businesses and their employees embrace remote work as a permanent option of the post-pandemic workplace, local governments could continue to lose revenue from once-vibrant downtowns in terms of commercial property taxes, public transportation, and sales and income taxes.

While government coffers are recovering from the pandemic-induced, recession-like dip in revenue of the past year and a half, public officials are bracing for a years-long climb back as city centers refocus on housing, entertainment and mixed-use buildings to fill the gap left in office-centric downtowns that will—at least for the near future—host fewer commuters.

“There will be a dip for a couple of years” as more employees than usual work remotely and venture less often into city centers to work, shop and eat out, predicts former Ventura, California Mayor William Fulton, director the Kinder Institute for Urban Research at Rice University in Houston. “Office building values will go down; the resulting property taxes will go down. There will be less bar and restaurant activity [and therefore less sales tax collected]. That will last two to three years.”

Downtown retailers that closed shop during the pandemic may never return, but he says bars and eateries will take their place. “The appetite for that is ferocious. … I actually think we’re going to see this incredible roaring back of bars and restaurants. They’re already packed.”

That appetite will be fueled by remote workers, many of whom eventually will straggle back to their offices, Fulton predicts.

Arjun Ramani, a researcher at Stanford University who is an author of a paper on migration patterns, agrees. “I don’t see the kind of doomsday scenario about teleworking in its extreme form,” he says.

In May 2020, remote work accounted for 35% of the U.S. workforce, according to the Bureau of Labor Statistics, which shows that number progressively declining in the months since. Stanford economist Nicholas Bloom puts that peak number closer to “an incredible 42%.”

But few expect full-time remote work to take hold, as employers call their staffs back to jobs requiring creative collaboration and as hotels, stores, restaurants, bars, salons and other businesses needing on-site help boost capacity in downtowns. 

Many economists, like Ramani, a Stanford graduate student, predict employees who continue to telework will do so one to three days per week but work on-site on days when their presence is required at meetings and for teamwork. Younger workers, says Eric Maribojoc, executive director of the Center for Real Estate Entrepreneurship at George Mason University, will be among the most eager to return because they enjoy the social aspect of working with others.

“Telework isn’t going away,” Maribojoc says. “But over time, the cities and traditional employment centers will recover. … It will take some time, though, five years or more, but we’ll see things close to back to normal in cities.”

“There’s a lot of uncertainty about this,” Ramani agrees. “Managers are dealing with a shift. There will be a lot of experimentation. The post-Covid equilibrium won’t be settled for a long time.”

Lower Property Values Mean Lower Taxes

In the meantime, Maribojoc says, commercial buildings will be dotted with vacant offices, lowering their property values—which means they will pay less in property taxes. That, economists predict, could lead  some building owners to repurpose the space from commercial to residential.

“Real estate rarely remains vacant forever,” Maribojoc says. “It’s a matter of finding new uses for space.”

Still, it will take time, he says, as commercial leases typically span five years, so renovations leading to repurposing might be not begin immediately.

The pandemic “decimated city budgets” in 2020, according to the National League of Cities’ latest State of the Cities report. In a survey of city officials and public statements from mayors, 41% reported a decrease in general fund revenues because of the pandemic; 17% identified that dip as “one of the most significant negative conditions affecting their communities.

Along with the decline in property and sales taxes resulting from a lack of employees working in offices and spending far less money in restaurants and stores, cities suffered “broad-based declines” in fees for parking, utilities and building permits as construction slowed, according to the report. In addition, cities that collect income taxes from commuters lost revenue as at least one in four Americans worked from home.

But the NLC, whose State of the Cities report a year ago painted a dire picture of city finances, now points to a recovery jump-started by a combination of American Rescue Plan Act funds, which cities can use to cover lost revenues this year and next; the Covid-19 vaccine; and millennial suburbanites eager to sample city living.

“Our outlook at that point was much more dire,” Christiana McFarland, NLC’s research director, admits. “We didn’t know there would be [such] proactive policies.”

She called the ARPA ”huge. It’s going to be transformational.”

Recovery on the Way

McFarland, an author of the report, says cities are “thinking strategically about replacing lost revenue, making themselves whole, laying a solid foundation …. to think bigger about what transformational changes they can make in their community.”

Ramani says that transformation will see more young renters and homeowners moving into cities—even if they continue to telework.

“People priced out of city centers now are pricing back in because they are more affordable,” he says. “Younger people have other reasons to live in cities other than just work, like parties, friends, restaurants.” So commercial property owners are “making cities more attractive to younger people.”

As a result, he says, “We can already see rents coming back, not all the way to pre-pandemic [levels], but some of the way.”

McFarland says recovering cities will re-emphasize the pre-pandemic trend toward mixed-use buildings, which include street-level retail, entertainment and services beneath offices and apartments or condos.

To that end, says Joshua Leon, chair of political science and international studies at Iona College in New York, he expects cities to offer tax breaks and other incentives to businesses and property owners who “put in the buildings the things that people need” as both remote workers and residents return to cities. 

“I hope that’s what cities do, instead of trying to pull back to the status quo,” he says.