This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.
Welcome to Reed Smith's viewpoints — timely commentary from our lawyers on topics relevant to your business and wider industry. Browse to see the latest news and subscribe to receive updates on topics that matter to you, directly to your mailbox.
| 2 minutes read

How Can Cities Capitalize on Distressed Commercial Real Estate?

There is no longer a wait and see period to determine how the pandemic impacted the commercial real estate market. Cities are experiencing historically high vacancy rates in their downtown districts. Commercial tenants have reduced their footprint and adapted to the new hybrid realities of post-pandemic life. Buildings that were once fully leased, sit nearly vacant with remaining tenants facing foreclosure. Now is the time for cities and property owners to decide where to focus their attention – on the retention of existing tenants or redevelopment for new tenants. 

There are several ways for cities to implement incentives that make owning and developing commercial property more affordable. One way is via assessment appeals. Cities are giving property owners the chance to appeal their property tax assessments based on today’s value of the property. Owners are seeing huge savings on their tax bills, but at what cost? In Pittsburgh, nearly 25% of the city’s property tax revenue comes from the downtown area. While cities hope that the property owners will take the tax savings and reinvest in the buildings, they are under no obligation to do so. 

One way cities can offer tax savings while ensuring the savings are being reinvested into the city is through tax abatement programs. Tax abatements reduce tax payments for a period of years so long as certain criteria are met, such as requiring the property to be redeveloped for residential use. Cleveland, Ohio implemented a 15 year tax abatement program coupled with other incentives for rehabilitating historic buildings. Five office towers in the downtown Cleveland area have been converted to residential and mixed-use buildings in recent years, turning the downtown area into a place to live as opposed to a place to work. Bringing people into the city after 5pm has helped to drive revenues and offset the loss of tax revenues. 

Finally, cities have the option to buy distressed real estate and develop it how they see fit. Instead of assisting existing property owners, cities are uniquely positioned to capitalize on the state of the real estate market. By becoming owners and landlords, cities can control the redevelopment and conversion of buildings without having to worry if building owners are taking advantage of tax savings and not re-investing in the revitalization of the city. 

Recently, many businesses are pushing their employees to return to the office, but is an increase in revenues from 9 to 5 enough to keep these cities from seeing further increases in distressed real estate? The answer is likely no. Affordable housing, tourism and mixed-use attractions are going to be just as, if not more, important than bringing employees back to the office. Cities are faced with the challenge of making it as easy as possible for property owners to rebound while keeping city revenues up. The next five years will be telling as more office leases come to an end and financing matures.  

There is no longer a wait and see period to determine how the pandemic impacted the commercial real estate market.


real estate, distressed real estate, distressed opportunities, commercial real estate, offices, us real estate, pittsburgh