In recent months, the financial press has expressed growing fear of an economy-wrecking crisis in commercial real estate. The specific concern is that as the trillions in mortgages on America’s non-residential buildings come up for renewal over the next few years, the combination of higher interest rates and reduced demand for corporate workspace due to more people working from home will force too many of the properties’ owners into bankruptcy.
Such a development would clearly challenge those cities and counties whose budgets are heavily dependent on tax revenue from office, retail, and light industrial sources. In the case of San Franciso, for example, more than a quarter of that city’s income is derived from assessments on its non-residential buildings. (READ MORE from Lewis M. Andrews: Christian Nationalism Benefits All Americans)
Even worse, a widespread meltdown in commercial real estate could threaten the stability of many regional banks, which since the 2008-2009 financial crisis have loaned or invested heavily in this area. According to Wall Street Journal reporters Shane Shifflett and Konrad Putzier, these “banks’ exposure is even bigger than commonly reported” and is “in danger of setting off a doom-loop scenario where loan losses trigger banks to cut their lending, which in turn leads to further drops in property prices and yet more losses.”
Until recently, many landlords had pinned their hopes for a revival of commercial real estate on efforts by Amazon, Facebook, J.P. Morgan, and other big-name companies to set a post-Covid example and require employees still working from home to come back to the office. But with an October report by CNBC showing that a full third of the country’s workforce continues to work remotely or hybrid — and the cost of commuting now “wildly more expensive” than it was in 2019 — it has become increasingly clear that any chance of preventing a full-blown meltdown will require multiple solutions.
It is always a good thing when politicians can get behind a policy which delivers a genuine public good.
Part of the problem could be solved, as the Bi-Partisan Policy Center has documented, by converting commercial buildings near residential neighborhoods into apartments or condominiums — at least those commercial buildings which can be altered to satisfy residential building codes without too much trouble. And Forbes contributor Mark Zettl believes that some commercial buildings near regional data center hubs like Northern Virginia, Dallas, and the San Francisco Bay area can be repurposed to meet the accelerating demand for computational infrastructure.
But what may prove the most helpful suggestion comes from Kerry McDonald, a senior education fellow at the Foundation for Economic Education (FEE). Noting that the high vacancy rate in commercial office space coincides with a growing interest in school choice across the U.S., she has begun urging companies and their landlords to consider starting their own small K-12th grade academies.
What these so-called “microschools” lack in size, McDonald notes, they more than make up for by providing older students with internship opportunities at nearby businesses, as well as access to resources like the local community college. Equally important, they give parents who work in or near the school the option to be much more involved with their children’s educations.
McDonald cites the example of Revolution School, an accredited private high school located in the downtown facilities of AJO Vista, a Philadelphia investment advisory firm. Founded in 2019 by company partner Gina Moore, the school has 31 students who come from a wide variety of city neighborhoods. Five students pay the full $25,000 tuition, most qualify for a reduced $5,000 fee, and several are supported by private scholarship-granting organizations. (READ MORE: Soaring Debt Will Fracture the Democrat Party)
As these figures suggest, it is not the profit potential of small office-based schools which can do much to moderate the declining value of commercial real estate. Most microschools are considered successful if they can just break even.
But by providing families with an affordable alternative to their local public school, microschools do have the power to revive long distressed urban areas — places like Buffalo, Cleveland, and Milwaukee as well as the blighted sections of larger cities like Atlanta, Chicago, and Los Angeles. A power that state and local politicians might well want to subsidize by giving tax breaks and credits to landlords which either host microschools or encourage their tenants to do so.
As North Carolina University professor Bartley Danielsen and other researchers have long documented, the key to persuading businesspeople and young professionals to settle in rundown metropolitan areas is convincing them that their children will not have to attend bad schools. “The biggest thing that keeps away entrepreneurs and others with the ability to renovate distressed areas,” as Danielsen himself puts it, “is the poor quality of the public schools.”
William Mattox, director of the Marshall Center for Educational Options at Florida’s James Madison Institute, agrees. “Middle-income households do not invest in areas that have had a hard time attracting or retaining upwardly-mobile families,” he notes. If you want to attract families to “towns they once would not have considered,” you must “remove the … barrier to a quality education.”
Examples of how alternative schooling can spark the redevelopment of even the most stubbornly depressed areas abound. In 2000, for example, the placement of an independent charter school in Santa Ana led to the rapid revitalization of one of the least prosperous cities in Orange County, California. And in Charlotte, North Carolina, Episcopal minister Marty McCarthy has successively rehabilitated a number of the city’s blighted areas by raising funds to open inexpensive private and parochial schools.
Perhaps the most dramatic case involves the University of Pennsylvania, which for decades had struggled to keep the rundown neighborhood around its urban campus from completely collapsing. Nothing Penn tried seemed to work until someone in the administration hit on the idea of building and maintaining an alternative to the local public elementary school. Almost overnight, the community rebounded as families from outside the area discovered that moving in did not mean depriving their kids of a good education.
Indeed, the use of non-public schools to stimulate urban redevelopment would undoubtedly be much greater today, were it not for the cost of the space required to run them and the lack of local administrative talent. But the silver lining to America’s commercial real estate crisis is that it has provided the country with an office vacancy rate of 20 percent and, given the right tax incentives, plenty of landlords and tenants could be easily persuaded to redeploy some of that unused space for educational purposes. (READ MORE: Meet the Suburban Parents)
“I really do love the idea of the owner of a distressed commercial building getting a tax benefit (to house a school),” says Don Soifer, CEO of the National Microschooling Center. Already “the most common space for locating a microschool is a strip mall or retail space,” he notes, but with some kind of tax incentive “the number would multiply without a doubt,” enhancing the appeal of even the most distressed communities.
It is always a good thing when politicians can get behind a policy which delivers a genuine public good, but giving commercial landlords and tenants some incentive to host their own schools promises three: the revival of long distressed urban areas, the expansion of educational options for local families, and, most urgently, help in stemming America’s looming real estate collapse.