From central business districts to suburban office parks, times have been challenging during the past few years. Trends sparked by the pandemic substantially altered the way Americans do business, ways reflected in headlines of office vacancies and fire-sale deals. But there appears to be room for cautious optimism with new opportunities for certain markets and properties — possibilities created through government actions.

It’s no surprise that the office market is in flux. The pandemic increased hybrid and remote work options, and such choices led to reduced space needs for many office users. While many workers have returned to office centers, and although one can see a flight to quality that has helped certain properties, occupancy, and rents have fallen in many cases, trends that impact tax collections. This is a big deal for governments, especially since office taxes have a big part in state and local government financing.

Not all property taxes come from office buildings, but their size and importance are significant. The Tax Policy Center, citing various sources, points out that “the decline in office values is projected to cost the District of Columbia $464 million in combined tax revenue over the next three fiscal years.

Similarly, San Francisco could lose $150 million to  $200 million annually by 2028, about 5 to 6% of all current property taxes. In Boston, almost three quarters of its current total general revenues comes from property taxes; of that, more than half comes from commercial, industrial, and tangible personal property (22% comes from office buildings alone).”

The Government Response

In April 2024, the federal government said that pandemic work policies were over, and it was time for most of its employees to return to their offices.

It was the government’s expectation, said the Office of Management and Budget (OMB), that “agencies will continue to substantially increase meaningful in-person work at Federal offices, particularly at headquarters and equivalents, while still using flexible operational policies as an important tool in talent recruitment and retention.”

The government’s action wasn’t surprising. The U.S. Government Accountability Office (GAO) reported last year that the government owned 511 million sq. ft. and had 7,685 leases, totaling nearly 180 million sq. ft. of private space. A vast majority of it used for office.

“The private sector will find that they are not alone when it comes to navigating the office space shift: government offices are experiencing an even slower return to in-person work compared to the private sector,” said Trepp last year. “The federal government is the largest tenant of office spaces throughout the U.S., and the General Services Administration (GSA) is leasing over 43 million square feet, which makes up one-third of the overall market.”

The catch is that while the government owns and leases a lot of space, usage declined substantially during the pandemic. In early 2023, the GAO found that “17 agencies’ buildings were at 25% capacity or less.”

A private company might respond to such news by subleasing space, not renewing leases, or both. Governments can do the same, but the implications differ from private organizations.

A local market or submarket can be significantly impacted if a government agency exits from a large office facility. More vacant square footage can reduce leasing rates for nearby buildings as well as negatively impact small businesses. The result can be lowered property values, less area spending, fewer neighboring jobs, and smaller government revenues.

The New Workplace Reality

With the Covid-19 emergency rules now a year behind us, federal return-to-work policies mirror the standards adopted by many private-sector corporations. Hybrid schedules and remote opportunities remain available for selected employees, but in-person work remains the norm.

Companies are beginning to rethink remote relationships. This can be seen in a study by Live Data Technologies. It looked at two million white-collar workers in 2023 and found that remote employees were 35% more likely to be laid off and 31% less likely to be promoted. And, as we reported recently with data from ZipRecruiter, the typical in-person salary offer was $82,037 versus $59,992 for those with hybrid schedules, a $22,000 difference.

The Public Buildings Reform Board, in a March report to Congress, said “The post-pandemic telework policies of the federal government have resulted in record-low utilization of the existing federal real estate portfolio. As a result, sharp declines in demand for federal office space and rising costs have pushed unnecessary spending to unprecedented levels.”

“The post-COVID environment,” said the Board, “has delivered a once-in-a-lifetime opportunity for the federal government to realign office space into a smaller, higher quality, and cost-effective portfolio. Currently underutilized properties can be repositioned within communities and add to the tax base or be repurposed to suit community needs.”

Pessimists will see the Board report as a dismal warning that more office space will soon flood the marketplace. Optimists might see the report as an opportunity to take advantage of the Federal Assets Sale and Transfer Act of 2016 (FASTA), which requires the Office of Management and Budget and GSA to identify opportunities for the Federal Government to reduce its inventory of civilian real property.

What makes FASTA interesting is that it “waives numerous disposal laws, provides a better solution to the current crisis of underutilized property, and provides funds for agencies willing to plan and participate,” according to the Board.

In the same way that Superfund sites have been successfully redeveloped, there may well be rehabilitation opportunities with selected federal properties as they become available.

Helping to Clear the Hurdles of Office-to-Residential Conversions

For all the promise and optimism surrounding office-to-residential conversions, the truth is, they can be prohibitively costly and highly impractical. Goldman Sachs pointed out in a March 2024 report that, “Only about 0.4% of office space was converted into multifamily units per year before the pandemic, and so far, this has risen only to 0.5% in 2023, suggesting that there are still large financial and physical hurdles to conversion.”

To encourage conversion activity, there are numerous and well-funded federal programs. In October 2023, the government published a guide listing office-to-residential conversion resources and programs — some of which offer a significant amount of financial support.

In addition, the Department of Transportation has set aside as much as $35 billion for transit-oriented development (TOD) projects, including “a commercial-to-residential conversion project where a developer rehabilitates a vacant office building and converts it into housing.” HUD has $10 billion in block grant money, funds that can be used “to boost housing supply — including the acquisition, rehabilitation, and conversion of commercial properties to residential uses and mixed-use development.”

Conclusion

Return-to-work policies, better regulations, expansive funding, and other programs illustrate increased government efforts to better support office. While all are encouraging actions in the right direction, only time will tell if the government’s aim will hit its mark and breathe new life into the sector.

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