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Empty Office Buildings Squeeze City Budgets as Property Values Fall

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Despite the stress on the commercial real estate sector, it has proved to be relatively resilient so far. But policymakers are keeping a close eye on the potential for more problematic fallout as the pandemic persists.

Esther George, president and chief executive of the Federal Reserve Bank of Kansas City, said in a February speech that emergency lending and relief programs had largely kept rent payments flowing, preventing delinquency rates on bank loans secured by commercial properties from rising as high as some analysts had feared. However, she suggested that more might need to be done.

“A worrying scenario is that the economic impact of the pandemic outlasts the policy support programs currently in place,” Ms. George said. “Should that occur, many renters and businesses could find themselves unable to meet their obligations, forcing banks to realize losses on existing loans and weighing on credit growth and broader economic activity.”

Even some economists who have expressed skepticism about municipal aid have acknowledged that lost commercial property tax revenue is an area that could use some targeted shoring up. However, they remain concerned about Congress writing checks to cities that do not need the money with a blanket bailout.

“I’m actually quite worried about the commercial real estate sector,” said Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office who has advised Republicans. “I have no objection to there being some sort of support for that particular area.”

Many in the real estate industry have been frustrated by the restrictions that cities and states have imposed on businesses because of the pandemic, blaming them for bankruptcies and plummeting property values.

Jacob Wintersteen, a real estate developer in Texas and the finance chairman for the Houston area for the state’s Republican Party, said he feared local governments would continue with pandemic restrictions if they knew the federal government would prop them up.

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