Oct 15, 2020 - Economy

A property tax proposal to unfreeze commercial real estate

Felix Salmon

One undisputed victim of the pandemic is the commercial real-estate market — both offices and retail — as people work from home and go out less.

Why it matters: The problem is that commercial real estate prices are sticky. They go up a lot more easily than they come down. If they would come down to a market-clearing level, that would vastly increase economic activity and help cities — New York foremost among them — get back on their feet.

How it works: Columbia University law professor Tim Wu explains in the New York Times just why prices are sticky.

Landlords have multiple incentives to keep real estate empty, rather than renting it out at a decreased rent. They range from the tax regime to clauses in mortgage contracts to accounting practices to simple hope that an empty space, kept empty long enough, will eventually find a top-dollar tenant.
Those incentives collectively impose a huge negative externality on cities. Empty storefronts help no one.

The solution: Wu suggests that cities should raise property taxes when commercial real estate is empty for more than 90 days, giving landlords a countervailing incentive to rent their property out at lower-than-desired prices.

The bottom line: There's no shortage of potential tenants willing to fill empty spaces — at the right price.

Maybe what we need here is an auction mechanism to ensure cities get moving again.

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A property tax proposal to unfreeze commercial real estate

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