A Ghostly Commercial Sprawl Drains Municipal Funds

Empty offices, malls, and factories blight U.S. communities just when they most need commercial real estate revenues the sites once provided

By Greg T. Spielberg

"A Ghostly Commercial Sprawl Drains Municipal Funds" was inspired by BusinessWeek.com reader Dale May. May is a former employee of the Horsehead Corp. and a resident of Bartlesville, Okla.

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For governments grappling with a fierce economic downturn, urban sprawl is turning out to be far less of a problem than empty sprawl. Across America the skeletal remains of millions of square feet of commercial real estate have produced a sharp decline in tax revenues. This is forcing government to deal with an upsurge in business properties that are no longer productive.

While home foreclosures have been a central problem in America's real estate crisis, nonperforming commercial properties are playing a major role in roiling municipal finances. The most populous state, California, faces a $42 billion budget deficit, coupled with a state law that prohibits an increase in property taxes—the primary source of state revenue. A combination of federal stimulus money and severe budget cuts are likely to be the state's only short term option. "They do triage," says Robert Lang, co-director of the Metropolitan Institute, a development think tank at Virginia Tech, of budget writers.

By and large, many vacant commercial properties will remain that way until credit markets ease and business regains some confidence in the economy's outlook. Commercial real estate listings at LoopNet.com (LOOP), rose 16% to 651,000 in the fourth quarter of 2008 from a year earlier, said Mike Manning, a vice-president of the San Francisco-based commercial real estate site.

Afflicted Suburban developers

In Sacramento, a city that boomed when times were good, concern runs rampant about the effect of empty and abandoned commercial real estate. Four blocks from California's General Assembly, where lobbyists have typically swarmed for office space, demand is soft. A building owned by Los Angeles-based realtor CB Richard Ellis Group (CBG) is 50% vacant despite floor-to-ceiling windows, a newly renovated interior, and a stone's throw to the Capitol stairs. "If we had listed this in 2006, there might be ten different groups interested," Senior Vice-President Ken Turton says. "Today there's three or two."

Fourteen miles south, in suburban Elk Grove, more than a third of the town's office space sits empty. A 107-acre mall, the Elk Grove Promenade, was highly touted for years as a major economic bonanza but now sits on hold indefinitely. The Promenade's financially troubled developer, General Growth Properties (GGP), owes the city $400,000, according to the Sacramento Bee. Its stock now trades at 35¢ per share, down from 44 last May.

Optimism is hard to muster these days—even for Steve Czarnecki, executive director of the Elk Grove Economic Development Corp., who says it's his job "to put things into positive context." Elk Grove's gross tax receipts fell a cumulative 15.3% in the second and third quarters of 2008, compared with 2007, largely a result of the implosion in commercial real estate. In 2006 the Elk Grove Saturn (GM) dealership and a Circuit City store were on the city's list of top 25 sales tax producers. The bankrupt Circuit City electronics chain, which turns off the lights nationally March 8, dropped off the list in 2007. Both properties now sit vacant: The Saturn car dealership is shuttered and stained with graffiti.

Cleveland's "bizarre retail landscape"

Property taxes are Sacramento County's largest source of revenue, followed by sales taxes, and static property dries up both streams. Buildings appraised three years ago, at the height of the speculative boom, are being reassessed at lower rates. At this point many cities and states would welcome flipping—the rapid turnover of property—as such transactions produce revenues.