New York City’s office space utilization remains depressed, primarily due to the accelerated transition to remote or hybrid work for many office jobs. Given the significant influence that commercial real estate and the office market play on NYC’s economy and tax base, the city’s Comptroller, Brad Lander, has published a new “doomsday” scenario showing the potential effects of a CRE downturn impacting the city’s revenue through the end of the decade.
Under Lander’s most pessimistic scenario, there would be a 40% plunge in office space property from 2023 to 2029. This could cause a revenue shortfall for the city of around $322.7 million in the fiscal year 2025, increasing to $1.2 billion in 2027. This only makes up 3% of the property tax level and only 1.3% of all city tax revenues.
Real estate taxes is one of the most significant contributors to the city’s coffers, providing about 30% of its $109 billion budget revenue. Offices account for 20% of the property tax revenue and 10% of the overall revenue. The current CRE downturn is gaining momentum as “record high” vacancy rates surpass levels during the 2001 and 2008 recessions.
A CRE downturn in the early 1990s took years for recovery to manifest. If history is about to repeat itself, the office space market could be in a multi-year downturn.
Based on the report, Lander assumes the office market values would slide 6% annually from fiscal 2025 through fiscal 2027, with additional declines until 2031.
A depressed office space market with high vacancy rates will impact the local economy, such as restaurants, bars, nail salons, theaters, etc., that rely on office workers to spend money. “Going forward, though, a major and growing concern is its effect on tax revenues and thus the City’s fiscal situation,” Lander said.
However, Lander warned, “Downward pressure on office building valuations could also adversely affect lenders if a significant number of property owners were to default on their loans or mortgages.”
While even in the most pessimistic scenario, a CRE downturn won’t tank NYC’s revenue, its effects on the local economy would stymie any economic recovery for years.