Marketplace - Vacant office buildings are making city budgets vulnerable

Episode Date: February 16, 2024

Vacant offices have been tough on the commercial real estate industry, and more recently lenders that have built a big business on those property loans. But the biggest losers are cities that depend on commercial property taxes. In this episode, some municipalities face big revenue shortfalls. Also: another blow to ESG investing, the cost of big-name credit cards and our excess stuff is feeding the booming storage space industry.

Hey, Marketplace listeners, you know around here we like to think you're never too young to learn about the economy and financial basics. That's why we're bringing the Million Bazillion Live Tour to schools to teach important lessons about budgeting, investing, saving, and more. It's all the fun of the podcast, but now live, immersive, and interactive. Special thanks to our tour partner, Greenlight, the debit card and money app for kids and teens. Learn more about Greenlight at greenlight.com slash million. That is greenlight.com slash million. In which the theme of the program is too much stuff, economically and actually.

From American Public Media, this is Marketplace. In Los Angeles, I'm Kyle Risdell. It is Friday today. This one is the 16th of February. Good as always to have you along, everybody. Inflation, check. The labor market, check. Consumers, check. The politics of this economy, not today, death. Neela Richardson is at ADP. Sudeep Reddy is at Politico. Hey, you two. Hey, guys. So let's see. Neela, I want to start with you, the actual economist on this panel, and I want to ask you about the plethora of data that we had this week. There was CPI and PPI today, and we'll get to all that stuff. Here's what I want to talk about, though. I want to talk about jobs, and I want to talk about all the layoffs that have been happening now spreading beyond just technology. Nike announced layoffs today. Juxtapose that with the numbers we're getting on the labor market in this economy.

First time claims for unemployment were down this week. The jobs market last time we checked was 300 and some odd thousand. Reconcile that difference for me, would you? So the way to reconcile this is that the layoffs that make the headlines that we hear announced as companies are reporting their earnings and making big announcements aren't the ones that are trickling down into layoffs. You're still seeing the country produce a solid amount of jobs. There has been pockets of layoffs, most notably, though, in media and in tech, these are companies that may have over-indexed on hiring on the way to recovery. And they're kind of right-sizing and restructuring. But overall, if you look at the macro economy, jobs gains are still happening, but the drivers have shifted.

Healthcare, education, those are the big drivers of growth. Retail, I, add that. Leisure and hospitality has been solid, where you've seen weakness, where we've seen weakness at ADP. It's in manufacturing. It's in information. So it's not all one note, this economy. There's still jobs being produced, though. I truly don't want to make light of anybody losing their job because that's a horrible and a devastating thing.

But big picture, does the labor market not worry you? You're not worried about the labor market then? I'm always worried about the labor market. That's my job. Says the labor economist. Yeah, I should have thought of that. Sorry. No, I think that layoffs are terrible for the people who are experiencing them.

And I'm noting the shift, the shift from layoffs coming from blue-collar to white-collar jobs. And I think that's new for people to be experiencing. And so these are jobs that often pay severance packages. And that's maybe why they're not hitting the initial jobless claims, which is our best real-time proxy for layoffs, as quickly as other jobs might. So I think this is definitely a watch point that I'm looking at very closely and to see how it evolves over the course of the year. All right, Sudeep, another watch point, and I'll just throw the data out, right? Consumer price index came in hotter than anybody wanted.

The producer price index came in today. Inflation at the wholesale level came in hotter than anybody wanted. It got all kinds of blaring headlines when the CPI came in today. Inflation at the wholesale level came in hotter than anybody wanted. It got all kinds of blaring headlines when the CPI came in. I guess my question is, we always knew this last mile was going to be bumpy. Are you concerned? Kai, I'm not an economist, unlike Neil. Absolutely. There's only one economist in this conversation. Exactly. But I think what all economists have been noting all along is this is not going to move

in a straight line. You're going to have ups and downs. And this is the fully expected last mile issue with inflation. It's that last stretch that's going to be really concerning. But we've had enormous progress to get to this point. I think if you look back from where we've come from, we always kind of knew that the inflation in goods would bleed into the inflation in services and then inflation in goods would be coming up and down. You know, there are a lot of ships going around the Red Sea right now and going across the Horn of Africa

to come up. And so there are going to be signs of inflation coming from that disruption. There are going to be pockets of inflation hitting all sorts of different areas of the economy. The real question is whether the inflation pressures reemerge and cause that thing that everybody's been worried about from the 1970s, where in the mid-70s, things got worse again and led to embedded inflation problems. There's still some risk of that. But I would say that there's probably more risk of something happening in the other direction. Sorry, say more about that something in the other direction. What does that mean? We are in a point of a lot of the pressures. We've seen this in the

job openings. We've seen this in some of the episodic layoffs that we've seen in the economy. There are pockets of the economy that are not necessarily going to have the same inflation pressures that they once did. And if any of that falls apart, then the inflation problem that we're talking about now isn't going to be inflation ticking up. It's going to be inflation dropping very quickly. Obviously, we've been avoiding an inflation, a downward inflation problem because the economy is holding up. As long as the labor market holds up, as we just discussed, then the inflation problem is going to take a little bit longer to resolve. Labor market falls apart. Inflation is not going to be that issue that we're talking about. Right. That's not going to be the concern. Right. Exactly. Another thing that has to hold up, Neela Richardson, is consumers.

And I note with a little bit of concern, honestly, the unexpected drop in retail sales that we got this week. A turning point or just, again, a watch point for you? This is a great opening because I was waiting to make an economist joke. You go, whatever you want. You know, in January, the economists all turned into meteorologists and blamed the weather for whatever bad data point that they see. And I think you saw a lot of that today about this latest retail number. We don't know if it's a blip. I will say that a pretty cold winter and a pretty warm December might have pushed some of that spending into December and not January.

But look, the consumer has been super strong and resilient, held up by the labor market. It's starting to experience as a whole real job growth, which is very different than the inflation eroding wage growth of years before. years before. So real wages are up. And I think that's going to continue to support growth in the economy, though it may be slower than last year. What I hear both of you saying, Sudip, is, look, there's some data points that make you kind of raise an eyebrow. But all in all, again, and still, this economy is doing well. Yeah, this is a classic micro versus macro issue. There are individual pockets of concern, the layoffs in tech, the layoffs in media, the layoffs in a few other areas that we've seen along the way. But in the big picture, to have an economy that is delivering job growth at the pace it is, to have unemployment this low, to have GDP growth, it is better than everybody else is doing. And we should be happy about this, given how bad things have been on the inflation front and some other gauges over the last two years. Nila, quickly on that point about better than everybody else is doing, Japan, we saw this week dipped into a recession. The U.K. has dipped into a recession.

The United States, far and away the healthiest economy in the world. Yes, we are the marble that doesn't look like anybody else in terms of the advanced economies. And the question is not necessarily why Europe is not doing as well. It's why is the U.S. doing so great? It's mystifying in some ways. Economic growth in the U.S. has been much stronger than expected. But when you look at Europe, UK, and then Japan in particular, UK and Europe is dealing with the energy price skyrocketing after the Ukraine invasion that still had some blowback effects. But if you look at, you know, all the advanced economies, they have one thing in common. They all have very strong labor markets, maybe save China. So this is something that's really important because that means that even the weakness that we're seeing in the UK and Japan is likely to be short lived because their consumer base and these are consumer based economies are still being held upright by a very strong labor market. Nila Richardson at ADP, Sadoop Reddy at Politico.

Thanks, you two. Thanks, Kai. On this Friday, mid-February, a little chilly, actually, on Wall Street. We'll have the details when we do the numbers. So so There is not a thing that happens in this economy without it affecting something else, whether it's consumer spending, business investment, taxes, you name it. There are knock on effects to it. We have talked a lot about vacant offices these days and how they've been challenging for commercial real estate and how that is

challenging for commercial real estate lenders. Most recently and most high profile, New York Community Bank. We've told you about them. The biggest losers of all of that, though, and not just monetarily, are cities. Empty offices do mean empty business districts. Yes, of course, that is a civic morale thing as well. But the falling values of commercial real estate creates a big tax problem. Take Boston. Over the next five years, it could face a tax revenue shortfall to the tune of as much as a billion and a half dollars. That's according to a new study from the Boston Policy Institute, as Marketplace's Kristen Schwab explains. How much commercial real estate impacts a city's budget comes down to a

few things. One, how much office space it has. Two, how much the value of those offices have fallen. And three, how much the city depends on those commercial property taxes. Here in Boston, we are incredibly dependent on it. Evan Horowitz authored the Boston Policy Institute study. He says about 40 percent of Boston's revenue comes from property taxes on commercial buildings, which is high compared to other cities. According to his calculations, Boston faces a commercial tax revenue gap of 10 percent. Cities like San Francisco and New York could also face a shortfall. It's not the kind of thing that you can address with creative accounting or

kicking the can. Cities could reduce services, though that can make a slowing neighborhood even less desirable. They could also make money somewhere else. Think traffic congestion pricing. But these are nickel and dime approaches. Cities like Boston need something big. David Merriman is an economist at the University of Illinois, Chicago. The quickest fix would be to shift the burden onto residential. And of course, that's going to be very painful. Painful for homeowners and painful for politicians, because, well, how many homeowners are going to vote for raising taxes? But it would make up for some of the shortfall. Merriman says closing the rest of the budget gap would likely be up to states.

The big cities are the economic driving engine of every state. They're generating actually a lot more revenue, state revenues, than is directed towards them. Of course, a state giving a bigger portion of its money to its buzzy city may be an unpopular move. I'm Kristen Schwab for Marketplace. You don't have to give us money for our podcast. I mean, you could if you wanted to, but you don't have to. If you miss something on the air, you know where to get it. Marketplace.org or the platform of your choice.

Follow us there. ESG. Environmental, social, and governance. Once upon a time, the new, new thing in investing in business, shorthand ESG was for getting companies to think about those things more, which I mentioned because there is news of ESG today. J.P. Morgan and State Street have both pulled out of a global investor coalition advocating for more of it. Climate Action 100 Plus is the group. The investment behemoth BlackRock is cutting its involvement, too. Altogether, it means about $14 trillion in assets leaving the ESG coordination efforts. So the beginning of the ESG end, perhaps? Marketplace's Kimberly Adams did some asking around.

Despite these high-profile departures... I don't think that ESG is dead. Sam Hartsmark teaches finance at Boston College. I will say, I think the term ESG might be dead, even if what most people mean by ESG is still going to go on. Hartsmark says companies will still pay attention to the environment, social and governance issues, but may call it something else or focus on one category more than another. Many firms have been under pressure from Republicans to back away from ESG goals, especially on climate issues. Sarah Hunt is president of the Joseph Rainey Center for Public Policy and says she understands these

companies' moves. It just means that they are being cautious as being perceived as political as they should be because that isn't their job. Their job is to manage the money. Hunt compares the political pressure to get companies to bail on ESG goals to the efforts from progressives that got companies to sign on in the first place. Trying to pressure asset managers from the right or the left with boycotts or bans or being part of coalitions seen as very political, it's a distraction from their fiduciary duty to maximize returns. But many advocates argue ESG is a key part of companies' But many advocates argue ESG is a key part of companies' fiduciary duties. Leanne Keddy teaches accounting at Carleton University and says when big companies back away from ESG efforts, it sends a bad signal to other companies.

Public commitments are one of the ways that we can hold some of these organizations to account. So I feel like pulling out of some of those public commitments, it's a loss of accountability. At a time, says Keddie, when we need that accountability more than ever. In Washington, I'm Kimberly Adams for Marketplace. Coming up... Excess clothes, furniture, music, equipment, all kinds of stuff. So much stuff. But first, let's do the numbers. The Dow Industrial is off 145.

Today, almost four-tenths percent, 38,627 for the blue chips. The Nasdaq subtracted 130 points, just about eight-tenths percent there, 15,775. The S&P 500 gave back 24 points, almost a half percent, finished at 5,005. For the week, the Dow off about a tenth percent. The Nasdaq slipped one and a third percent. The S&P 500 gave back a bit more than four-tenths of one percent. Roku dimmed almost 24 percent today after forecasting first quarter loss is going to be bigger than expected. The streaming platform pinned the blame on competition for consumers' streaming dollars.

You don't say. Restaurant software company Toast rang up almost 17% today after bringing in more revenue than analysts expected in the fourth quarter of last year. The company also, because capitalism said it was going to be laying off more than 500 people. Think about what Neela said, though. Bond prices down. Yield on the 10-year T-note, 4.28%. You're listening to Marketplace. This is Marketplace. I'm Kai Risdahl. Money has a cost. We talk about that a lot, mostly in the context, I grant you, of the Federal Reserve and interest rates.

The Fed, however, and the rate it controls, it's called the federal funds rate, if you're curious, they are not the only rate game in town. There is plain old consumer credit, for instance. And a report out today from the Consumer Financial Protection Bureau is worthy of a mention. The CFPB finds the biggest credit card issuers in the United States generally charge higher interest rates and fees than do smaller banks and credit unions. Quite a bit higher, too. The median interest rate offered by a big card company to a customer with good credit, it should be said, was 28 percent. Compare that with an 18 percent interest rate, again median, from a small card issuer.

Marketplace's Stephanie Hughes has that one. The credit card companies with names you've heard of have a big advantage. You've heard of them. And with credit cards, that goes a long way. The more you know about a particular brand, the better in your mind the advantages and benefits of using that brand. Neil Doss is a professor of marketing

and supply chain management at Appalachian State University. He says big banks and credit card companies are good at getting in front of us by bombarding us with mailers and ads. He says that's one reason why customers will sign up for their credit cards, even if their rates are high. They might say that, oh, you know what, they might charge more, but it's what I know. I think I feel safe with that. Also, customers might pay attention to a card's introductory interest rate, which might be excitingly low. And they'll skim over what it'll turn into after a year or so.

All this is getting increasingly expensive for borrowers, says Julie Morgan of the Consumer Financial Protection Bureau. We're seeing consumers paying a lot more in interest. Consumers paid $105 billion in interest in 2022 alone. That's huge. About half of U.S. credit card users revolve. That means they don't pay down the whole balance at the end of the month. They're the ones who will be feeling the pain of those higher rates, says Claire Green, a payments risk expert at the Federal Reserve Bank of Atlanta. When you look at the cost of credit cards, there's a large difference between people who pay off every month and get points,

free airplane ride once in a while, and people who revolve and are paying interest rates. And once people become used to a particular credit card, they often don't want or just can't be bothered to switch to another. One thing we find generally about payments behavior is that it's a habit. And all our habits, as we know, are incredibly sticky. So before going with a card, marketing professor Neil Doss suggests looking at the whole package and not just a familiar name. I'm Stephanie Hughes for Marketplace. As you know, if you've kept an ear to the business and economic news the past four-ish years or so,

you know that we, American consumers, have been buying prodigious amounts of stuff early in the pandemic. Mostly we have shifted to services since. Sudeep talked about this a little bit. But the fact of the matter is that our homes and apartments are bursting at the seams. Hence this. In the past five years, the self-storage industry has added more than 265 million square feet of rentable space across the country. That's about 10 square miles. Data comes courtesy of the real estate research firm Yardie Matrix, which also says nearly one in five Americans rents storage space away from home. So either we've got too much stuff or there is something else going on, or maybe both. Here's Marketplace's Amy Scott. Brian Whittem is showing me around one of the newest self-storage

spaces in the Baltimore area. He leads the Mid-Atlantic Division at Extra Space Storage. They're the ones with the green signs. And if you're picturing rows of low-slung buildings with roll-up doors on the outskirts of town, that's not what this is. We want it to be sort of the Nordstroms of storage is kind of what we're looking for. The Nordstroms of storage includes climate control throughout and giant bay doors where customers can drive in to load and unload their coffee tables and stamp collections out of the elements. Unique feature for this one too is you can see all the security that we have, all the cameras and everything. Huge monitors show customers what a security guard would see every angle of the brightly lit building. So right from when you

pull in you're in a safe space, clean space, secure space. And then right across the street, we're looking at your competitor over there. Public storage, yep. Public storage, the chain with orange signs. I actually counted seven self-storage spaces, including another extra space, and a stretch of about three miles along I-83. So is this kind of like Burger King and McDonald's, like it's okay to be across the street from your competition because there's that much demand?

Yes. Whitton says this almost 800-unit space in Timonium, Maryland, opened almost four years ago during the pandemic, when a lot of us cleared out space to work at home and a ton of people moved. In the office, I find Tasha Brown buying boxes and inquiring about storage for an unexpected move. Unfortunately, I have to move out of our dwelling that we lived at for six years. Her landlord had stopped paying the mortgage and lost the property to foreclosure. So, very unfortunate,

but I have to get boxes to pack up my stuff and my children. Another force has been driving the recent explosion in storage space, investors. Frank DeSalvo leads self-storage investment sales at Franklin Street Real Estate Services. He says at the same time, migration grew during the pandemic. We had this really cheap capital, right, 3 percent, 4 percent interest rates, and it needed a place to go. Everybody wanted to spend the money.

But many of the traditional commercial real estate investments, apartment buildings, shopping centers, office space, weren't doing so hot. And self-storage really kind of came to a new level during that time period because it was very safe. Safe, DeSalvo says, because self-storage holds up pretty well during recessions, when more people and businesses have to downsize or move. But now, DeSalvo says some markets have too much storage space. Delinquencies and vacancy rates have been rising. Still, the industry can count on one thing. The American economy is built on consumption, right? We need to buy more.

Ushma Pandya is co-founder of Think Zero, a waste reduction firm. Consumer spending on goods keeps growing in spite of inflation. Meanwhile, a whole industry has grown up around decluttering. We have all this stuff that we're all trying to get out of our house. And I'm like, why did we buy it? At the Extra Space Storage in Timonium, I find Steve Crawford unloading a shovel and hedge trimmer from his SUV to move into his 10x10 storage space. What else has he got in there? Things I can't fit in my house.

Excess clothes, furniture, music, equipment, all kinds of stuff. Crawford is a longtime customer. Like 40% of the people who rent from Extra Space, he lives in a three-bedroom townhouse with no basement for his gear. You ever wonder, why am I paying to store all this stuff? I should just get rid of it. Once a month when I see the bill. The bill is now $273 a month. He's trying to pare down the

stuff he stores here and hopes to eventually let the space go. In Timonium, Maryland, I'm Amy Scott This final note on the way out today, economic parade, rain on it, one hates to, but the news is what the news is. A gallon of gas today, AAA national average, $3.28. A week ago, $3.16. A week ago, $3.16. A month ago, $3.07. Our theme music was composed by B.J. Lederman, Marketplace's executive producers, Nancy Fargali. Donna Tam is the executive editor. Neil Scarborough is vice president and general manager. I'm Kyle Rosdell. Have a great weekend, everybody. We will see you back here on Monday, all right? This is APM.

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