It’s no secret that the commercial real estate sector is struggling. Since the pandemic forced millions into remote work arrangements a few years ago, offices never quite recovered.
In fact, the vacancy rate for the third quarter topped 19%, and by year’s end, Moody’s Analytics predicts vacancies will hit 19.3%—tying for the highest rate ever recorded. When you throw in the recent collapse of WeWork, which declared bankruptcy last month and rents nearly 20 million square feet of office space across the country, the picture for CRE only looks bleaker.
Still, as with everything in real estate, it all comes down to location. According to Moody’s, the way WeWork’s demise and the general office slump will impact things could vary widely by city. Here are the places that could get hit hardest.
The Markets Most at Risk of a Commercial Real Estate Downturn
Atlanta takes the cake as the most at-risk in a CRE downturn, according to Moody’s data. Not only does commercial real estate make up nearly half of the city’s total assessed property value, but a whopping 40% of its government’s revenue comes from property taxes.
The city also has a 23% vacancy rate right now, and WeWork is pulling out of at least two of its locations in Atlanta, according to The Atlanta Journal-Constitution.
Boston is also in trouble. There, 64% of the government budget comes from tax assessments—and CRE makes up nearly a third of the assessed value of property in the city.
New York City, Houston, and San Francisco round out the top five for most at-risk markets. San Francisco’s property taxes make up 41% of its local budget, and the city has a jaw-dropping 27% vacancy rate, according to Moody’s.
Below is the full list of cities in Moody’s report. Note that the top six, Atlanta, Boston, NYC, Houston, San Francisco, and Denver, all face the highest risk.
| City | Property Tax % Government Revenue | % Assessed Value from Commercial Property | Commercial Property Tax Sensitivity % | Vacancy Rate % |
|---|---|---|---|---|
| Atlanta, GA | 39 | 48 | 19 | 23 |
| Boston, MA | 64 | 29 | 19 | 14 |
| New York City, NY | 27 | 45 | 12 | 23 |
| Houston, TX | 32 | 34 | 11 | 25 |
| San Francisco, CA | 41 | 26 | 11 | 27 |
| Denver, CO | 19 | 51 | 10 | 22 |
| Chicago, IL | 26 | 34 | 9 | 24 |
| Washington, DC | 19 | 46 | 9 | 20 |
| Portland, OR | 37 | 21 | 8 | 20 |
| San Antonio, TX | 29 | 22 | 6 | 17 |
| San Diego, CA | 26 | 18 | 5 | 15 |
| Los Angeles, CA | 27 | 17 | 5 | 26 |
| Philadelphia, PA | 12 | 26 | 3 | 26 |
| Phoenix, AZ | 9 | 23 | 2 | 26 |
The Markets That Look the Safest
It’s not all bad news. According to Moody’s data, some cities are poised to weather a CRE downturn pretty well.
“Some cities with high concentrations of commercial property aren’t heavily reliant on property taxes for revenue, leaving them more insulated from swings in commercial real estate assessed value,” Moody’s said in the report.
The safest place appears to be Phoenix, which gets a mere 9% of its budget from property taxes. Add in that CRE comprises less than a quarter of the city’s total assessed value, and Arizona’s capital is pretty well protected.
Philadelphia should also hold up well, with just 12% of its government revenue coming from tax assessments and CRE making up about a quarter of all assessed value. Los Angeles, San Diego, and San Antonio, Texas, are on the safer end of the spectrum, too. In San Diego, the vacancy rate is a mere 15%.
The Bottom Line
The moral of the story? Interest in office space is certainly waning—and the fallout of WeWork’s bankruptcy won’t help that. But how that will play out on the ground? It could range quite a bit. As Moody’s puts it: “There’s significant variation in the potential credit impacts of the commercial property downturn.”
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
