The Impact of Remote Workers on America’s Downtowns


  • The decline in commuters has led to falling prices for downtown investments and strains on cities’ finances.
  • Suburban areas are emerging as winners, attracting companies and workers seeking lower taxes.
  • The future of downtown office spaces is uncertain, with decreasing property values and challenges in determining their current worth.
  • Despite the challenges, there are opportunities for revitalization and resilience in certain neighborhoods and industries.

Bonds linked to New York subways and buses are being paid less by investors. Real-estate investment trusts focused on downtown areas are trading at less than half their pre-pandemic levels. Bondholders are demanding extra interest for holding office-building debt. 

Downtowns have been a significant source of tax revenue for American cities, but with white-collar workers spending more time in their home offices, investments linked to downtowns are trading at falling prices in volatile markets. 

This is not good news for cities’ finances or their residents. It puts a strain on traditional ways of extracting wealth, such as collecting property taxes on office buildings, taxes on wages earned within city limits, and fares from office workers’ commutes. 

Some cities are bracing for austerity, with many New York library branches expecting to close an additional day each week under proposed cuts. Residents and visitors in cities like New York, Chicago, and San Francisco complain about empty downtown streets and transit stops that have become way stations for the mentally ill and homeless.

The Suburbs or the City?

Analysts at Asset Preservation Advisors Atlanta, a municipal bond management firm, are closely monitoring downtown areas. The team remains confident in certain tax-backed bonds sold by New York City and Boston, but has grown wary of debt from some other Northern urban centers and big California cities, even bonds backed by those cities’ full taxing power.

According to keycard tracking by building security company Kastle Systems, office buildings in 10 major metro areas are only about 50% occupied compared to pre-Covid-19 levels. Federal transit data also show public transportation ridership at less than 70% of pre-Covid levels in major metro areas.

More than a year ago, President Biden stated that it was time for America to return to work and “repopulate our great downtowns.” However, even within the federal workforce, over half of the employees worked remotely at least one day per week last year, according to a survey.

Investors’ apprehension towards downtown areas is evident in the pricing of bonds supported by commuter fares. The lower the bond’s price, the higher its interest yield. In New York, certain bonds supported by bus, subway, and commuter-train fares yielded a high 1.25 percentage points above top-rated municipal bonds on June 14, a spread 56% wider than before Covid, according to ICE Data Services, a financial analytics company.

While the bonds remain investment grade and many fund managers are comfortable holding them, fund Preservation Advisors has ceased buying New York Metropolitan Transportation Authority fare-backed debt unless it matures shortly.

According to Bank of America data, consumers who buy a typical type of low-rated commercial mortgage-backed instrument are requesting 9.25 percentage points more interest than those who buy 10-year Treasurys as of June 12. This margin is three times greater than it was prior to the pandemic for such assets, which finance a property mix that includes approximately 30% office space.

The Office space

Recently, subsidiaries of Pacific Investment Management and Brookfield Asset Management defaulted on over $2 billion in commercial mortgage-backed securities related to office towers in New York, San Francisco, Los Angeles, and other cities.

On June 15, the average share prices of the five largest real estate investment trusts that focus on downtown office buildings were down 63% from the end of 2019. In contrast, REITs that concentrate on retail property and apartments experienced much smaller price declines of 7% and 8%, respectively.

Determining the current value of downtown office buildings is challenging due to decreased sales and long-term leases that do not adjust to shifting demand. Columbia Business School professor Stijn Van Nieuwerburgh predicts that over the next decade, the market will gradually reprice these properties.

He and his colleagues at Columbia and New York University have estimated that the value of office properties in U.S. cities has decreased by 38% since the pandemic began, resulting in a loss of approximately $500 billion.

As property values continue to decline, some office building owners are disputing their tax bills. If these challenges result in lower tax assessments, it will force big-city officials to make an uncomfortable decision: either collect less revenue or rely more heavily on other taxpayers.

According to Green Street, a real estate analytics firm, office-building property taxes account for about 10% of revenue in major cities. The firm predicts that “future city budgets with high levels of remote work” will face a dire financial situation. Older cities in the Northeast, Midwest, and California with high debt loads and pension liabilities are already struggling with their budgets, in contrast to sprawling metropolises in the South and West.

This year, Los Angeles began implementing a tax on home sales exceeding $5 million. Mayor Eric Adams of New York supports the establishment of two newly state-authorized casinos in the city. Several proposals for revitalizing downtown areas, such as converting vacant office spaces into residential units, entertainment venues, or daycare facilities, may take years to generate financial returns. Despite the impact of remote work, the cities are not facing financial difficulties, as they are still home to numerous affluent individuals and corporations. Additionally, certain residential neighborhoods are benefiting from the shift in work patterns. The significant fluctuations in the prices of publicly traded securities associated with office buildings and transportation will have limited significance if the underlying assets recover quickly.

According to budget figures compiled by the National League of Cities, an advocacy group, cities’ operating expenditures declined on average in 2022. Adjusted for inflation, cities experienced the largest drop in both spending and revenue in almost 40 years, except for the period following the 2008-09 financial crisis. However, deeper budget cuts were avoided due to the federal aid provided when Covid struck. Sales and income tax revenue surged in 2020 and 2021, as stocks boomed and consumers spent stimulus checks. Unfortunately, both the tax windfalls and aid money are running out.

Asset Preservation Advisors Atlanta manages approximately $6 billion in municipal bonds for affluent households and other clients. The team, which works from the office four days a week, combs through data such as cellphone activity in downtown areas and sewer hookups for new homes in expanding metro areas.

Going west, going south

The team is increasingly discovering opportunities in suburban bonds in lower-tax Southern and Western states that have attracted companies and workers who are no longer tied to Northern big-city centers. According to the U.S. Labor Department, securities-industry jobs, which were traditionally associated with Wall Street, have increased by 20% or more in Utah, Georgia, Tennessee, Texas, Wyoming, and North Carolina since 2019.

Citadel, a hedge fund, relocated its headquarters from Chicago to Miami, while Elliott Management moved its headquarters from New York to West Palm Beach, Florida. In January, investment giant BlackRock opened a satellite office in West Palm Beach.

One city that Woods’s team has decided to avoid is San Francisco, where the tech industry has embraced remote work and is now laying off employees. “We’re seeing an emperor without clothes to a certain degree,” said Woods. “We just want to be very cautious.”

Meta Platforms, Salesforce, Yelp, and Block have announced their plans to sublease or not renew office space. According to a lawsuit filed by its landlord, an affiliate of Pimco-owned Columbia Property Trust, Twitter has stopped paying rent on some of its San Francisco offices, and the landlord later defaulted on the building.

Research from the University of Toronto shows that cellphone activity in downtown San Francisco was at 32% of its pre-Covid level as of last winter.

When San Francisco sold bonds in March, it laid out budgetary risks. According to real estate services firm CBRE, about a quarter of its office space is vacant, which is the biggest increase from before Covid of any major city. In April, downtown ridership on the Bay Area Rapid Transit system was 34% of its pre-pandemic level. Although they remain investment grade, S&P Global Ratings downgraded some of San Francisco’s commuter rail bonds on June 1.

There have been some signs of recovery, as downtown sales tax revenue was 19% higher in the last three months of 2022 compared to the same period in 2021.

Asset Preservation Advisors is particularly concerned about a flurry of requests from landlords of downtown office buildings to reduce the properties’ tax values. According to a forecast by the controller’s office, this could result in San Francisco’s annual property-tax revenue, currently around $3 billion, being $100 million to $200 million lower than expected in each of the next five years.

Despite this, the firm is cautious about counting any city out. In the early 2000s, it decided to mostly steer clear of bonds from its hometown, Atlanta, due to concerns about city finances and a bribery scandal.