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Office Rethink Has Cities Skittish On The Future Of Their Property Tax Revenue

City leaders are on high alert that shifting work habits and hybrid office plans could make their budgets vulnerable to drops in the value of commercial buildings, especially if municipalities ignore continuing concerns about congestion and quality-of-life issues.

The iconic King and Queen office towers in the city of Sandy Springs.

The mayors of Sandy Springs, Dunwoody and Brookhaven, Georgia — three cities that comprise Atlanta's Central Perimeter area, miles north of downtown — said they are now working together to lure new residents and businesses that could fill in offices emptied by companies reducing their footprints. 

"What kind of need is there going to be for all this office space around here? Are people going to continue to work from home?” Sandy Springs Mayor Rusty Paul said during a Bisnow panel earlier this month. “It's going to have a major impact on the real estate markets. Real estate drives our revenues, so it's something we got to figure out together.”

While Sandy Springs and Dunwoody have a strong residential base, Paul said their tax revenues heavily rely on businesses; Central Perimeter has more than 23M SF of office and 6M SF of retail space.

"I’m not worried that companies will leave, but that they will require less space as work-at-home becomes a permanent fixture," Paul wrote in an email after the event. "The question becomes how do you backfill any unused existing space with new uses."

But congestion issues and competition from submarkets like Midtown and North Fulton threaten to drive companies from Central Perimeter, eroding future tax revenues.

“There are areas nipping at our heels,” Brookhaven Mayor John Ernst said. “It makes us better because we realize if we don't continue to try and be our best, someone will overtake us very, very quickly.”

That has the cities exploring ways to create a better experience for area employees and commuters — more than 225,000 driving in each weekday — to keep businesses growing in Central Perimeter, Paul said. 

“That's the one thing that I warned people about. We've got more Fortune 500 companies in the Perimeter market than Pittsburgh. People don't realize what a major headquarters place this is,” Paul said. “But most of them are renting, they're leasing. And if conditions get so bad, it's just as easy for them to leave as when they came. We can't just assume that this is going to go on forever.”

Skyline Seven Real Estate Senior Vice President Ryan Holzer moderated a panel of Central Perimeter mayors: Sandy Springs Mayor Rusty Paul, Dunwoody Mayor Lynn Deutsch and Brookhaven Mayor John Ernst.

The coronavirus pandemic already hit the three cities' budgets, including Sandy Springs, which saw tax revenues decline from $116.2M in 2020 to $91.5M this fiscal year, although the city projects its fiscal 2022 revenues to reach $144.6M according to the Marietta Daily Journal.

Taxes from businesses will play a big part in Sandy Spring's projected tax revenues. The city is expecting commercial and residential property taxes and a local option sales tax will account for more than $60M of its $92M in revenue.

Despite some notable corporate move-ins, including Carvana's massive sublease of one of the State Farm office towers, the Central Perimeter office market has taken a hit so far this year. Through the third quarter, Central Perimeter's offices saw 1.1M SF of negative net absorption, according to JLL, second in Metro Atlanta only to Buckhead, where absorption fell by 1.2M SF.

The mayors said the region is at risk of losing tenants — and their employees who pay local taxes — to other areas of Metro Atlanta, including Midtown and North Fulton without addressing quality-of-life issues, such as congestion and more pedestrian pathways.

Ernst said Brookhaven is exploring ways to create a “village feel” with pedestrian paths that will interconnect the various commercial and residential nodes in the city, including the MARTA station and the mixed-use Town Brookhaven development along Peachtree Road, south of Central Perimeter proper.

Sandy Springs Mayor Rusty Paul said the city needs to create an experience that will continue to lure corporate workers.

“Connecting has always been a job of the city. You hear about connecting people all along. It's highways. It's been the internet. But now we're, in a lot of ways, going back to the basics. It's sidewalks. It's multi-use paths,” Ernst said. “That's kind of been the focus and what we've been moving forward with.”

Central Perimeter, through its community improvement district, has been addressing road infrastructure as a means of combating congestion. Most recently, the region is expanding and improving the Interstate 285 and Georgia 400 interchange. The area also could tie into a bus rapid transit system that would travel along I-285 through Central Perimeter, a system that Dunwoody Mayor Lynn Deutsch said could address some of the traffic caused by the daily commute.

“We'll continue to work because we all know this is the goose that laid the golden eggs for our community for tax revenue when it comes to jobs and economic growth,” Paul said. “But we need to make sure we're also staying focused on what kind of experience people have when they drive here. It's about the experience that people have while they're there. And we need to start focusing a little bit more on that experiential aspect of the job market.”

The pandemic did have a silver lining for Dunwoody's economy. Deutsch said the pandemic allowed many Dunwoody residents to discover the amenities in the city and in Central Perimeter as a whole, including new restaurants and rooftop bars.

“In a lot of ways, Dunwoody residents had previously forgotten that Perimeter was part of Dunwoody unless they worked or lived right there,” she said. “Having those amenities available during the pandemic has really enhanced the connection between our residential city and our commercial center.”