KBRA releases research discussing how the nationwide shift to remote or hybrid work coupled with the downsizing of tech sector employment and, in some urban centers, oversupply of commercial real estate, have contributed to record commercial office vacancies and rising loan delinquencies across many U.S. cities. This KBRA report examines measures of commercial office market pressure in New York City, Los Angeles, Chicago, and Dallas, and discusses the potential impact of reduced commercial property values on the property tax base in these top U.S. metro areas.

Key Takeaways

• The extent of the decline in U.S. commercial office real estate valuations varies by city, depending on supply and demand. In most cities, the reduction in office occupancy related to remote or hybrid work arrangements has precipitated elevated commercial office vacancy rates and diminished leasing activity in all but top-tier office buildings.
• The market and assessed values of affected commercial properties are likely to fall as the decrease in leasing activity and eventual reduction in rental rates plays out—in some cases leading to mortgage or loan defaults. However, it may take several years before such valuation declines affect property tax collections, given the assessment cycles and lease expiration trends observed in major cities.
• The impact of commercial office valuations on a city’s property tax collections will vary according to the office sector’s share of the total property tax base, the effective tax rate on commercial properties, the assessment process, the proportion of new “trophy” offices, and the city’s ability to easily adjust the levies of other classes of property (including residential) to account for a decline in commercial property tax revenues. The relative dependence on property tax revenues to support general fund operations also varies across the U.S.
• Banks estimate that a record $1.5 trillion of U.S. commercial property loans are coming due by the end of 2025. Accordingly, the increase in foreclosures evident over the last year is expected to accelerate. This is likely to have a proportionately more immediate and consequential effect on the banking sector than on local governments’ property tax revenues and fiscal budgets, due to lags built into cities’ assessment processes.

Click here to view the report.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1003346

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