by James A. Bacon
Office workers need less space than they once did. Over the years businesses’ space needs per office employee have shrunk from approximately 250 square feet to less than 190 square feet, says Ben Keddie, vice president of Coldwell Banker Commercial Elite, as quoted in the Fredericksburg Free Lance-Star. Office space is expensive, and businesses have learned how to function with less of it. With the rise of the mobile workforce, open work spaces and office hoteling, it is easier than ever to conserve space and rein in lease and rental costs.
That trend has dramatic, if unappreciated, consequences for local governments’ real estate tax base and the management of growth and development. If businesses need less office space per employee, they need less office space overall. Which means the cost of office space drops. Which means developers build fewer new office buildings. Which means local governments are finding it harder and harder to grow their tax base.
Loudoun County in Northern Virginia, it appears, is facing that very problem. “A softening commercial office market has made it difficult for developers to make money on their commercial land, because there are fewer companies interested in large parcels,” reports the Loudoun Times. Indeed, it might be said that outlying counties in the Washington metropolitan region are facing a trifecta of troubles regarding commercial real estate: (1) business enterprises are shrinking their office footprints everywhere; (2) sequestration-related budget cuts have dampened demand even more in the Washington region; and (3) when Washington-area businesses do seek new digs, they show strong preferences for walkable urbanism, a higher-density, mixed use pattern of development that accommodates walking, biking and mass transit. Walkable urbanism is found mainly in the region’s urban core and along Metro lines, not in low-density burbs like Loudoun.
Not surprisingly, Loudoun’s supervisors appear to be adrift in dealing with these trends. According to the Loudoun Times, the Board of Supervisors has been striking down applications by developers to rezone excess commercial land to residential on the grounds that residential incurs high costs for roads, schools and other infrastructure.
Loudoun County estimates that for every $1 spent on housing, the county pays $1.62. Developers dispute the latter number, suggesting that it is closer to $1.20. Either way, says Supervisor Shawn Williams, R-Broad Run, new residential development has a negative impact on the county’s operational budget.
Think about it: There is something severely wrong with a system that incentivizes local governments to limit residential development. If Loudoun County, which has the highest per capita income of any locality in the entire country and presumably has a building stock to match, can’t justify new residential development, then something is severely out of whack! It is precisely this attitude, and the resulting restrictions placed on the building of new residences, that creates housing scarcities and makes housing more expensive up and down the income scale.
In the old old tax model, a 60/40 balance between residential and commercial real estate property tax revenue was considered healthy. If you could get more commercial development, then great. If not, you had a problem. Well, almost every locality in the United States has, or will have, a problem as offices continue to downsize and retailing shifts from malls and shopping centers to online commerce. Local government generally, not just Loudoun County, will face a tax crisis. And if county boards and city councils all try to address it the same way as Loudoun — by restricting new housing construction — they will compound the tax crisis with a housing crisis.
What, then, is the answer? Local governments need to advance the emerging discipline of fiscal analytics. The core premise of fiscal analytics is that different human settlement patterns have different cost and revenue profiles. Some patterns generate more tax revenue per acre than other patterns. Some patterns have lower embedded costs for transportation, utilities and public services than others. Some human settlement patterns provide a much better balance between revenue and cost than others.
As a general rule, walkable urbanism (mixed use, medium density, complete streets, access to mass transit) comes closer to fiscal balance (revenues matching expenditures) than the scattered, low-density, auto-centric pattern commonly referred to as suburban sprawl. Continue reading