Category Archives: Business and Economy

How suburbs can lose millions in revenue when office parks sit empty

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The changes to offices in one Minneapolis suburb illustrate the money at stake for suburban communities:

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One surprising victim might be the Twin Cities suburbs. Take the 64,000-person suburb of Eagan, Minnesota where, earlier this year, two announcements upended the commercial landscape. Two of the city’s largest employers terminated leases at massive office parks, both of which served as local corporate headquarters…

Because commercial property is taxed at a higher rate than residential, for a city like Eagan, with a $42 million budget, the loss of two large corporate headquarters is a hit to its bottom line. In 2022, the two office parks provided about $3 million in tax dollars to the city, county and school board. (The city of Eagan’s cut of the tax revenue sits at around a third of that total.) 

Whatever happens to these two sites, they’ll likely be assessed at much lower values moving forward, likely swaying the rest of the suburban commercial real estate market. This puts pressure on Eagan’s single-family residential property to make up the difference, shifting the low-tax balance that draws people to live second-ring suburbs in the first place.

For their part, Eagan city leaders say these kinds of economic changes are nothing new, and the city is well-positioned to survive…

She cited the changing loss of previous corporate headquarters in the city, including Lockheed Martin and Northwest Airlines, both of which disappeared due to mergers or outsourcing.

Multiple forces are at work:

  1. Corporate offices change over time, before and after COVID-19. This suburb has seen companies go before and they found different businesses to lease office space.
  2. It is less clear the direction of the current office space market and financial markets are nervous. With more work from home and more Internet business, how much physical office space is necessary in the coming years?
  3. Filled office parks can help suburbs generate significant revenues and reduce tax burdens for others. Vacant buildings do not this at the same rate.
  4. Buildings that are vacant long-term are negative symbols. Communities want to have thriving businesses, not empty buildings. The longer the vacancy stretches, the bigger the consequences.
  5. Communities can redevelop such properties but this requires money, proactive local officials, and partners.

If we could come back to Eagan in a decade or two, will these properties be redeveloped mixed-use properties, vacant sites, or office parks operating at a decent capacity?

How empty are American offices right now?

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A headline of an analysis of office space and vacancies in the United States suggests “American offices are half-empty.” Is this true? Here is how the analysis starts:

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From Dallas and Minneapolis to New York and Los Angeles, offices sit vacant or underused, showing the staying power of the work-from-home era. But cleardesks and quiet break rooms aren’t just a headache for bosses eager to gather teams in person.

Investors and regulators, on high alert for signs of trouble in the financial system following recent bank failures, are now homing in on the downturn in the $20 trillion US commercial real estate market.

After detailing the economic effects of this, particularly how banks might be affected, here is some evidence for the headline:

Office properties have been getting hammered the hardest. Hybrid work remains popular, affecting the rents many building owners can charge. Average occupancy of offices in the United States is still less than half March 2020 levels, according to data from security provider Kastle.

And then it is back to the possible fallout, including:

Trouble may build as the economy slows. Hill thinks US commercial property valuations could fall roughly 20% to 25% this year. For offices, declines could be even steeper, topping 30%.

The headline suggests half of offices are empty. The primary piece of evidence in the article says that average office occupancy “is still less than half March 2020 levels.” Does that mean average office occupancy was 100% in March 2020? Does this mean half of office buildings have no people in them? Even if the real figure about empty offices is 30% or 40%, this would be a big number with lots of ramifications.

An earlier article on the same site had a similar headline and evidence. From early March 2023, the headline: “Offices are more than 50% filled for the first time since the pandemic started.” The evidence:

Office occupancy across 10 major US cities crossed 50.4% of pre-pandemic levels for the first time since early 2020, according to security swipe tracker Kastle Systems. That marks the first time occupancy has crossed the 50% mark since March 2020, when many offices sent workers home because of Covid.

Again, the comparison is pre-COVID levels, not necessarily 50% of total possible occupancy. Again, this is a significant change that is a little different than claiming offices are more than 50% filled.

This all might be pedantic, but, if we should pay attention to offices, working from home, and the consequences of changes to commercial real estate, what are the actual figures regarding how much office space is occupied and/or leased?

Big box stores in Michigan can have their property taxes assessed on their value as an empty building

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Having a vacant big box store in a community can be a big problem. But, what if the store if in business and generating revenue and it is being assessed for property tax purposes at a value closer to its value as an empty property? Such is the case in Michigan:

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The dark store theory was born, in part, out of the 2008 recession.

Big box stores closed. The massive buildings that housed them had few other obvious uses and, in some cases, restrictions on selling the buildings to competitors put in place by the companies themselves reduced the pool of potential buyers. They often sold for far less than they’d cost to build.

Michigan law allows assessors to determine the value of a property in three ways: based on replacement cost minus depreciation, based on the income a property generates and based on the sales of similar properties.

Retailers began to argue that sales of empty stores were the best indicator of what their properties were worth. The Michigan Tax Tribunal generally agreed…

Of the 110 cases brought before the tribunal by Walmart and its subsidiaries since 2018, 93 have resulted in lower taxable values, often millions of dollars lower. All but one was a negotiated settlement. Eleven of the 110 cases are ongoing.

Two factors may be at play here. Retailers and businesses want tax breaks. They want to pay fewer taxes and boost their profits. If communities are willing to offer tax breaks like this (or others), why not ask for them and utilize them?

On the other side, communities want to bring in businesses and jobs. These retailers still provide some work for local residents and they are still generating some tax revenue. Even if they do not pay in taxes what they might, would a community be willing for a big box store to move to a nearby community and the money go elsewhere? Some development or even bad development might be preferable to no development or an empty building.

The news story quoted above details how this may change in Michigan due to a court case. If these large corporations do have to pay more in property taxes, will they change their operations at all? And how might communities make use of the extra revenue to improve local lives?

Closing Walmart and Whole Foods locations and their responsibilities to urban neighborhoods

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Walmart announced yesterday it is closing four locations in Chicago:

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The simplest explanation is that collectively our Chicago stores have not been profitable since we opened the first one nearly 17 years ago – these stores lose tens of millions of dollars a year, and their annual losses nearly doubled in just the last five years. The remaining four Chicago stores continue to face the same business difficulties, but we think this decision gives us the best chance to help keep them open and serving the community.

Over the years, we have tried many different strategies to improve the business performance of these locations, including building smaller stores, localizing product assortment and offering services beyond traditional retail. We have invested hundreds of millions of dollars in the city, including $70 million in the last couple years to upgrade our stores and build two new Walmart Health facilities and a Walmart Academy training center.

It was hoped that these investments would help improve our stores’ performance. Unfortunately, these efforts have not materially improved the fundamental business challenges our stores are facing.

Chicago officials decried the closures:

Nedra Sims Fears, executive director of the Greater Chatham Initiative, said the closure of the store and health center in Chatham was “deeply disappointing.”…

“All communities in Chicago should have access to essential goods and services,” Lightfoot said in the statement. “That is why I’m incredibly disappointed that Walmart, a strong partner in the past, has announced the closing of several locations throughout the South and West sides of the City. Unceremoniously abandoning these neighborhoods will create barriers to basic needs for thousands of residents.”…

In a statement, Mayor-elect Brandon Johnson said his administration “will be committed to identifying ways to fill the gaps these closures will leave in neighborhoods, and also to finding other ways to ensure families have direct access to groceries in their communities.”

Ald. Sophia King, 4th, and Ald. Jason Ervin, 28th, whose wards include locations slated to close, both called the closures disappointing in statements Tuesday. “The west and south sides need committed partners to reverse decades of disinvestment and discrimination, and I hope Walmart will work hard to invest in the communities in Chicago that desperately need their presence,” Ervin said.

In San Francisco, a Whole Foods that opened downtown in 2022 closed earlier this week:

Whole Foods Market opened a new “flagship” branch Downtown, at Eighth and Market near the Trinity Place development, with much fanfare in March 2022. But just 13 months on, the supermarket chain has decided to close the store, which was shuttered at the end of business on Monday.

Residents and leaders expressed disappointment:

News of the store’s closure also sparked dismay online. Residents on Twitter described losing the supermarket as “disappointing,” and “disheartening,” while one warned: “As whole foods goes, so goes the neighborhood.”

The Whole Foods Market fell within the district of San Francisco District 6 Supervisor Matt Dorsey, who posted a thread about its closure on Twitter on Monday.

“I’m incredibly disappointed but sadly unsurprised by the temporary closure of Mid-Market’s Whole Foods,” he wrote. “Our neighborhood waited a long time for this supermarket, but we’re also well aware of problems they’ve experienced with drug-related retail theft, adjacent drug markets, and the many safety issues related to them.”

Residents of all communities need access to food. Certain neighborhoods are invested in less than others. A sizable grocery store can help anchor other business activity. Filling a vacant large commercial space can be difficult.

If a company says it cannot keep a store open – the two companies give different reasons above – what reasons might be acceptable to a community?

I would hope retailers and corporations want to go beyond just making money in a location. At the least, as corporations and politicians often remind us, they provide jobs. But, they can also be much more.

From subprime mortgage issues to superprime mortgage issues

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The most recent financial uncertainty includes mortgages in a superprime era:

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This is quite the turnaround. After 2008, banking the rich was often touted as a far better model. Even the biggest banks began aiming more of their consumer lending and wealth management at relatively better-off customers, and they scaled back on serving subprime customers. Wealthy customers seldom default, they bring lots of cash and commercial banking business and pay big fees for investments and advice, the thinking went.

But when interest rates shot up last year, it exposed weaknesses in the strategy. It isn’t that the rich are defaulting on loans in droves. But the most flush depositors with excess cash last year started taking their cash and seeking out higher yields in online banks, money funds or Treasurys. On top of that, startups and other private businesses started burning more cash, leading to deposit outflows…

A major way that the better-off do borrow from banks is to buy homes, and often in the form of what are known as jumbo mortgages. Jumbos are for loan amounts over $726,200 in most places, and over $1,089,300 in high-cost cities such as New York or San Francisco. Jumbo mortgages bring wealthy customers with lots of cash. They also are typically more difficult to sell to the market, in part because they aren’t guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. So banks often sit on them. But the value of these mortgages, many of which are fixed at low rates for the foreseeable future, have dropped as interest rates have risen.

To be sure, not all banks that focus on wealthier individual clients are under intense pressure. Shares of Morgan Stanley and Goldman Sachs, are down less than half as much this month as the nearly 30% decline for the KBW Nasdaq Bank index. But those banks are more diversified and focus more on the steadier, fee-generating parts of the wealth business, such as stock trading and asset management, than on mortgages or deposits.

I interpret this to mean that there is less money – or lower rates of return – to be made on big mortgages. Wealthy people will want to buy real estate, particularly because it is often assumed that the value of real estate will be good long-term, but the money does not generate the amount of money banks want.

If mortgages are too “boring” or do not generate enough money, could we be headed to an era where banks do not want to do mortgages? Money for mortgages could come from elsewhere.

Try to run an online world and a company town

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Would it be easier to run Twitter or build and oversee a company town? Elon Musk is exploring constructing a town in Texas for employees of his multiple firms:

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In meetings with landowners and real-estate agents, Mr. Musk and employees of his companies have described his vision as a sort of Texas utopia along the Colorado River, where his employees could live and work.

Executives at the Boring Co., Mr. Musk’s tunnel operation, have discussed and researched incorporating the town in Bastrop County, about 35 miles from Austin, which would allow Mr. Musk to set some regulations in his own municipality and expedite his plans, according to people familiar with Mr. Musk’s projects.

They say Mr. Musk and his top executives want his Austin-area employees, including workers at Boring, electric-car maker Tesla Inc. and space and exploration company SpaceX, to be able to live in new homes with below-market rents…

As of last year, Boring employees could apply for a home with rents starting at about $800 a month for a two- or three-bedroom, according to an advertisement for employees viewed by the Journal and people familiar with the plans. If an employee leaves or is fired, he or she would have to vacate the house within 30 days, those people said.

I am intrigued by the contrast between online and offline activity. I have argued before that the two realms are more linked than people think. Here, both the business activity spans these two realms as might the world of employees and visitors.

What might the fate be of this proposed community? On one hand, if the primary goal is to provide cheaper housing for employees, perhaps such a community could be really helpful. Since housing is a significant portion of household costs, providing cheaper good housing could help attract and retain employees. Another bonus is that employees are close to work and might be willing to work more hours.

On the other hand, when has a company town worked out well in the long-term? What regulations does Musk want to implement and what are the penalties for not adhering to them or disagreeing with them? Even with reduced housing prices, how will employees feel about always being tied to work?

My suspicion is that this will not work out as intended. Developing a community is no easy task and the interaction between work life and community life is hard to manage.

Remembering the frenzy and promise regarding Amazon HQ2

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Amazon announced part of their HQ2 is coming along on schedule but the full project will soon go on pause:

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John Schoettler, Amazon’s real estate head, said in a statement the company is pushing out the groundbreaking of PenPlace, the second phase of the sprawling northern Virginia campus. The first phase of the campus, known as Metropolitan Park, is expected to open on time this June and will be occupied by 8,000 employees.

The move comes as Amazon CEO Andy Jassy has taken steps to curtail expenses across the company in the face of slowing revenue and a gloomy economic outlook. That’s led to the company announcing the largest layoffs in its history, totaling more than 18,000 employees, while also reevaluating its real estate portfolio and sunsetting some projects…

PenPlace encompasses three 22-story office buildings, more than 100,000 square feet of retail space and a 350-foot-tall tower, called “The Helix.” The development is larger than Metropolitan Park, which sits south of PenPlace, and includes two additional, 22-story office towers, as well as a mixed-use site featuring retail, restaurants and green spaces.

Amazon selected Arlington as the site of HQ2, in addition to the Long Island City neighborhood of Queens, New York, as part of a closely watched, splashy search for a second headquarters that kicked off in 2017. The company announced in 2019 it would halt plans to build its new headquarters in New York after it faced pushback from local activists and city council leaders.

Numerous communities across the United States submitted proposals to host this second headquarters and the company sought tax breaks. The promise of the new headquarters involved at least these two big features: the status of Amazon in your community plus the thousands of jobs in a corporate headquarters.

With the changes in the world, will these promises pan out for Arlington, Virginia and the D.C. metro area? It sounds like at least 8,000 employees will be onsite. However, the headquarters may never be as big as once envisioned. Does Amazon have the same status in 2023 that it did in 2017? This include everything from its financial outlook to its recent layoffs to changes in the everyday Amazon experience for customers.

On the whole, I would guess local leaders will still pitch this as a big win. We got Amazon and all these jobs (and implying that others did not). The long-term effects might be less clear, particularly if tax breaks for Amazon and opportunity costs and the longer-term fortunes of the company are factored in.

The suburbs as the perfect places for drone deliveries

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Where might drones make deliveries? One project in Texas suggests the suburbs make a lot of sense for such deliveries:

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Flytrex, which specializes in on-demand, ultrafast delivery for food and retail, is bringing food and grocery orders via drone to front and backyards.

According to a release, the service will be based in Granbury, in a partnership with restaurant chain Brinker International, home of Chili’s Grill & Bar, Maggiano’s Little Italy, and two virtual brands: It’s Just Wings and Maggiano’s Italian Classics.

The service is operating in cooperation with longtime partner Causey Aviation Unmanned under a newly granted Federal Aviation Administration (FAA) waiver allowing a delivery radius of one nautical mile – reaching thousands of potential homes. Eligible households can order food via the Flytrex app.

Their focus is on the suburbs, where on-demand delivery has previously been viewed as commercially unviable, since traditional couriers can make only two deliveries per hour in such areas. They have a video showing a drone at work on YouTube.

Granbury is a small town of just over 11,000 residents roughly 30 miles southwest of Fort Worth and on the edge of the Dallas metropolitan area.

More broadly, it is interesting to note that the population densities of Granbury and the suburbs are what might make delivery by drone viable. Americans tend to like suburbs and driving. But, this is not as good for delivering food or other items. The same kind of space Americans like for their suburban homes does not work well with quick deliveries.

How many deliveries can drones make in an hour compared to vehicles? Are there also advantages to suburban deliveries from not having to encounter many tall buildings or obstacles?

If drones are better for suburban deliveries, are suburbanites open to drones flying above their homes to bring them things they have ordered? Suburbanites also like a connection to nature and drones may not provide that if they are flying or they can be heard above homes. The same drones that enable a consumer lifestyle do not necessarily fit with an image of quiet suburban properties.

Max Weber, American capitalism, and betting on weather

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In having a class recently read several chapters of Max Weber’s The Protestant Ethic and the Spirit of Capitalism, I was struck by one of the conclusions:

In the field of its highest development, in the United States, the pursuit of wealth, stripped of its religious and ethical meaning, tends to become associated with purely mundane passions, which often actually give it the character of sport.

According to Weber, by the early 1900s the practice of capitalism in the United States was taking on “the character of sport.”

How much more might this be true today? I then read a story about betting on the weather is taking off:

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Weather betting emerged and gained popularity during the pandemic.

“When the pandemic hit and sports shut down in March, most people will remember the NCAA tournament was canceled and within a day virtually everything shut down. There was nothing to bet on. The sports world naturally shut down and sports books were looking for something to attract customers. One of the popular things that emerged was betting on Russian table tennis and another was betting on the weather,” says Holden…

“There will be a proposition like, ‘Will there be rain on this day?’ and then individuals can select yes or no. Much like in over under betting for sports, the bookmaker sets a line where the total points can either go over or under and the better selects which will occur.”

Betting laws are strict in the U.S. and at the moment, weather betting is not regulated. However, it is allowed in places like Canada where sportsbooks are taking bets on the weather.

Some might say that betting on the weather is just another opportunity for gamblers to try to make money and for those in the gambling industry to make money. Following the quote from Weber above, perhaps it is just another outworking of capitalism in the United States. Why not make it like a sport? Why not try to generate money off the weather?

More people working from home + smaller corporate offices = more coworking spaces?

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Are recent trends coming together to make coworking spaces more popular? At least a few people think so:

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A distinct growth sector of the suburban office market, coworking has become a bastion of those downsizing from corporate space, fleeing the congestion of the city, or escaping the domestic distractions of working from home…

He said the New Jersey site opened at that Bell Works in March 2016 with 2,800 square feet. But as the popularity and future trending of coworking became clear, construction began on a 25,000-square-foot version elsewhere in the building — just before the pandemic.

Previously, the concept had been based on a desire in the market for flexibility and a better work-life balance. But the pandemic really hit the gas pedal for coworking…

While coworking sites already make up 7% of total office space, that amount is projected to reach 30% by 2030, she said.

Hauser, whose sister firm Workplace Studio also designs coworking spaces for others, said there are five elements that define coworking: flexible desks, meeting rooms, a sense of community, a community manager, and a source for economic development.

The transformation of office space continues.

One other factor hinted at in the experiences described in the article is this: a cool factor. The ability to access space in an interesting setting – such as the revamped Bell Works site in Hoffman Estates – with on-campus amenities is fun. Setting up coworking space in a quiet strip mall in a sleepy community would be less attractive. Being around energy and excitement helps make the the flexible workspace experience interesting.

I would be interested to know how much coworking space might emerge compared to the corporate office downsizing that might happen in the next few years. What percent will coworking occupy compared to the loss of traditional office space?