Should New York City RACE To Fill Empty Office Buildings?
Does everyone remember “the urban doom loop?”
As Covid-19 accelerated the shift to remote and hybrid work set-ups, that widely bruited term expressed the fear of a grim downward spiral for the nation’s cities. Emptied-out office buildings would reduce rental income for the owners and depress the value of the buildings. That, combined with the resulting drying up of spillover business activity in commercial districts, would mean less tax revenue for local government, leading to drastic cuts in city services, or higher local taxes, or both, creating a depressed business environment and a disastrously repeating cycle, ad infinitum.
While New York City seems to have escaped the worst-case version of this scenario, big soft spots remain in its all-important commercial real estate market. In 2019, Cushman & Wakefield, the major commercial property management firm, put Manhattan’s office vacancy rate at 11.1 percent. At the end of 2024, long after the end of the public health emergency phase of the pandemic, it was still more than twice that. The City’s Office of Management and Budget projects that by 2029, that office vacancy rate will have gradually declined to 18.3 percent – still two-thirds higher than it was pre-pandemic.
In response, City Hall has asked State leaders to enact a business tax credit intended to attract new, out-of-state tenants to mostly older (constructed pre-2000) office and manufacturing buildings. Whether it achieves its goal or not, this “Relocation Assistance Credit for Employees” (RACE) proposal illuminates a key element in New York’s uneven post-Covid business recovery:
A so-called “flight to quality” by commercial tenants who opt to pay higher rates for newer, more modern class “A” office space (in, for example, Hudson Yards), while reducing or eliminating space they lease in older class “B” and “C” buildings with creakier IT infrastructure and fewer up-to-date amenities.
(A financing bind further penalizes these less desirable sites. The terms of their bank loans often prevent the building owners from reducing rents to compete for tenants – and despite vacancies, asking rents in older building have not come down dramatically. At the same time, high interest rates have made it hard for owners to compete by financing the upgrades that would make their properties more attractive.)
The proposed RACE credit would initially be established as a three-year pilot program with a capped cost of $150 million and cover a maximum of 3,000 employees. Firms relocating from outside New York State and taking at least 20,000 square feet of commercial or manufacturing space, built pre-2000 anywhere in the city, would be eligible for a business income tax credit equal to $5,000 per relocated employee for 10 years, up to 500 employees.
The City’s Economic Development Corporation (EDC), which is pushing this proposal, estimates it will generate a $385 million benefit to the City over 10 years. That assumption rests on the expectation that in addition to the hoped-for 3,000 relocated workers, the economic shot in the arm they provide will generate almost as many additional direct and indirect jobs in lunch spots, office supply places, and shops and personal services establishments.
Here, critics of City business tax programs will likely want to sound a note of caution – something I also did in testimony last week to the City Council Finance Committee on this and other tax proposals. New York’s experience with other, similar tax incentive programs shows that anticipated gains in jobs and tax revenue have, at times, failed to meet expectations, or even materialize at all.
The RACE proposal is part of the New York State budget package now moving toward adoption by April 1st. So, legislators ought to take a hard look at its underlying assumptions before approving it. Its setup as a pilot program will also give them future opportunities to review RACE’s outcomes, and decide if its benefits are in line with its costs. Before adoption, the legislation enabling it should be amended to mandate a full such evaluation, requiring EDC’s cooperation and provision of data, before its pilot status might be extended.
Those caveats also prompt the question: Is the program necessary at all? It’s entirely possible to treat the malaise afflicting the city’s commercial property market as overstated or a passing or cyclical phenomenon. While current vacancy rates are high, they’re not unprecedented. They were just as great or greater in the mid-1990s, particularly in Lower Manhattan.
But there are also strong arguments against complacency. Keep in mind that thin financial ice under many of New York’s older office buildings is not just a problem for landlords. High vacancies mean lower building income and eventually lower market values, which are usually measured by the amount of income a property is expected to generate over time. If market value shrinks, property tax assessments do too.
Property taxes account for the biggest single piece (about 44 percent) of City tax revenue, and commercial landlords pay a sizable chunk of that bill. A true worst-case scenario for all of us would be a drip-drip-drip of tax delinquencies from commercial landlords, cutting into the revenues City services require.
Policymakers are pursuing a number of ways to prevent such outcomes. The City and State already have other programs underway to help building owners, either by providing financial assistance to upgrade their buildings or to facilitate conversion of under-used and out-of-date office buildings to residential or hotel use.
Bringing existing jobs into the city and signing leases in qualified buildings also will help support the value of older buildings and hopefully allow landlords to avoid tax delinquencies. While the RACE program may be more generous than necessary, it aims to address a major challenge for the City budget – namely, how to increase occupancy rates in older commercial buildings so as to avoid a major fall in their value. The simple answer is to increase the number of tenants.
George Sweeting is a Senior Fellow at the Center for New York City Affairs at The New School. For more than two decades, he managed research, analysis, and economic forecasts at New York City’s Independent Budget Office, ending his tenure there as IBO’s acting director. This Urban Matters draws on testimony he presented to the New York City Council Finance Committee on March 5th.
Photo by: Ahmed ElHusseiny
