Will Dysfunctional Governments Undermine Your CRE?

Signing a long-term lease is more than just a real estate decision—it’s a bet on the future of a city.

And in light of the tragedy of the Los Angeles wildfires, it's clear that government mismanagement can and will have lethal and financial consequences. 

Corporate tenants managing large-scale portfolios don’t just commit to office space or industrial sites; they commit to the economic, political, and regulatory landscape of a state or metro for the next 5, 10, or 15 years.

And as government misspending is rapidly accelerating urban decline, that decision has never been riskier.

No matter your political stance, the reality is painfully clear: poor governance leads to rising crime, deteriorating infrastructure, the flight of resources, rising taxes, and shrinking commercial property values.

The wrong location can drain profitability, threaten operational stability, and leave your company trapped in a failing market. State and local government is no longer just a factor when looking where to place your real estate dollars—it’s a dealbreaker.

Before you sign your next lease, consider the following factors: 

• How are government policies restricting your business?
• Are you trapping yourself in a lease with a high-debt state?
• Why is crime rising so dramatically in certain cities? 
• How can you leverage local and state governments to your advantage? 

Inept Government

Choosing the wrong city or state for a long-term lease isn’t just an inconvenience—it can be a multi-million-dollar mistake.

Bad governance doesn’t announce itself overnight; it creeps in through regulatory chaos, failing infrastructure, surging crime, and fiscal mismanagement. Corporate tenants who ignore these warning signs often find themselves trapped in a deteriorating business environment with no easy exit.

Key areas of concern include:

Bad Decisions Lead to State Debt

Cities that increase taxes, tighten regulations, or impose new compliance hurdles make long-term planning impossible and choke the potential for business success.

In fact, over half of U.S. states are now carrying unsustainable levels of debt, exacerbated by shrinking tax revenues, increased expenditures, and the gradual pullback of federal support.

The total debt levels in states like California, Illinois, New Jersey, New York, and Connecticut are reaching critical mass, placing their economic future at a crossroads.

Let's zoom in on California- currently sitting at $1.6 trillion in debt. 

The state of California, which used to be a booming economy is $1.6 trillion in debt. Every penny spent by this government should be scrutinized. So let's take a look at a few recent spending decisions... 

Governor Newsom wants voters to approve Proposition 1, a $6.38 billion bond for drug treatment facilities and homeless housing—on top of the $20 billion California has already spent on homelessness in the last five years. Yet, despite this massive spending, homelessness has only increased.

Breakdown of California's debt according to the California Policy Center:

On the positive side of this, after years of denying the link between addiction and homelessness, state leaders are finally acknowledging it. But will more taxpayer money solve the crisis, or just fund more failed policies?

Compare this to the $2.5 billion allocated for wildfire disaster relief—just a third of the proposed homelessness spending. Meanwhile, disputes between California's government and insurance companies left many victims without coverage, forcing them to lose their homes. Some were only notified six months before the fire that their policies had been dropped.

At the same time, Newsom has already pledged $50 million of the state's budget to fight Trump's new federal policies. Again, it's not a matter of politicial association. No matter what side of the aisle you stand, businesses and citizens cannot survive with these policies and misuse of government funds. 

In fact, they're rapidly driving away business. High-profile companies such as Oracle, Tesla, and Charles Schwab have relocated their headquarters from California to Texas, citing the latter's lower taxes and more business-friendly regulatory framework.

To cover this deficit, California has also proposed wealth taxes targeting high-net-worth individuals, which is only speeding up corporate decisions regarding executive relocations.

Often, states with massive pension deficits—like Illinois and California—resort to aggressive taxation to cover their financial mismanagement, forcing businesses to absorb the fallout. This is a mistake. 

California isn’t alone in its spending crisis—New York is facing the same downward spiral. Despite skyrocketing costs, quality of life is plummeting, driving a mass exodus from the state.

• Soaring Deficits: NYC faces a $14 billion budget gap over three years, with previous projections estimating a $27 billion shortfall.
• Affordability Crisis: Rents have surged, making even "affordable" housing unaffordable. Half of NYC families can't survive without assistance, according to ABC7. 
• Congestion Tax: Policy missteps that force citizens to cover deficits, further driving up the cost of living. 

Even former Governor Andrew Cuomo warned about the consequences: "I don't believe raising taxes on the rich," Cuomo said. "That would be the worst thing to do. You would just expand the shortfall. God forbid if the rich leave."

Yet, that’s exactly what’s happening. New York has led in external migration for years. As high earners and businesses flee, both states are left scrambling to fund ballooning deficits with fewer taxpayers to foot the bill.

The Urban Dystopian Cycle & Declining Property Values

The most debt-ridden states—California, New York, Illinois, and Massachusetts—are home to major cities where office occupancy rates average 50% and vacancies sit at 20%.  In reality, the 50% occupancy rate reflects a dormant vacancy rate. 

With landlords struggling to cover tax obligations, cities are losing out on one of their largest revenue sources: commercial property taxes. In Boston, for example, property taxes make up 36% of the city's revenue. As values plummet, the financial strain deepens.

And as property values decline and tax revenues shrink, another factor accelerates the downward spiral: rising crime.

Crime is more than a public relations problem—it’s an economic liability and a threat of the worst kind: to people.

The worst thing a business can do to its employees is put them in danger. Corporations must consider the risk of violence as a premier concern when looking for real estate investments. 

When crime rates rise, employees feel unsafe, security costs skyrocket, and office demand plummets. In cities already struggling with high vacancies, this creates a vicious cycle where businesses flee, landlords default, and tax revenues fall even further.

In fact, there is a direct correlation between the areas hardest hit and those that do not prosecute shoplifting. 

New York, Portland, and Los Angeles have all seen major office tenants relocate due to escalating crime in central business districts. Higher security costs, liability risks, and employee retention struggles quickly add up, making these markets increasingly unattractive. And in commercial real estate, perception matters.

Even the fear of crime can push vacancy rates higher, putting landlords in distress and limiting lease flexibility.

The result? A growing number of cities teeter on the edge of financial instability.

Dystopian Spiral: Decline in Infrastructure

With crime pushing away businesses and shrinking tax revenue, gasoline is thrown on the Urban Dystopian Spiral.

This is a dangerous and potentially irreversible cycle—where declining public safety accelerates economic flight, further shrinking the area’s GDP. Resulting budget shortfalls can leave cities scrambling to fund even basic services. In turn, dropping the quality of life even further. Businesses then flee and there goes all of the quality external amenities. 

Then, like a failing landlord who can’t upkeep the same level of building maintenance, cities with mounting debt and shrinking revenue streams are possibly forced to neglect critical infrastructure.

A city’s infrastructure is the backbone of business operations.

When roads, public transit, ports, and utilities fall into disrepair, corporate tenants pay the price—through higher logistics costs, supply chain delays, and employee productivity losses.

• Cracked roads, collapsing bridges, and outdated ports disrupt distribution channels.
• Aging power grids lead to outages—a major concern for data centers, manufacturers, and tech hubs.
• Lack of public transit investment limits workforce accessibility, forcing companies to subsidize commuting costs or lose talent.

The hidden cost? You don’t just pay for bad infrastructure—you pay for the consequences: missed deliveries, drop in recruitment, and lost productivity.

Leveraging Government to Boost Your Corporate Presence

While bad governance can lead to costly mistakes, the right location can provide an invaluable advantage for corporate tenants. A well-chosen city or state—one with a forward-thinking government and strategic incentives—can help businesses cut costs, accelerate growth, and establish a lasting presence.

Understanding the opportunities offered by the right location is key for corporate tenants seeking long-term success.

Public-Private Incentives and Business Attraction Policies

Many cities and states are actively competing to attract new business through aggressive public-private partnerships, tax incentives, infrastructure improvements, and workforce development programs.

These incentives can significantly reduce the operational burden on businesses, providing long-term financial relief and positioning them for success in a competitive market.

One of the most high-profile examples of the power of location in this context was Amazon’s search for its second headquarters, HQ2. Amazon’s decision-making process was driven, in part, by the incentives offered by different locations. Arlington, Virginia, with its mix of tax breaks, workforce access, and robust transportation infrastructure, successfully lured the tech giant.

The local government’s willingness to provide funding for infrastructure improvements, alongside a highly educated workforce, made Arlington an attractive destination for Amazon's headquarters.

In contrast, other cities—like New York—lost out during this search due to political pushback and regulatory concerns. Despite offering its own set of incentives, including tax breaks and zoning support, New York City’s political opposition, led by vocal local lawmakers, ultimately led to the tech giant’s decision to withdraw its plans. This serves as a powerful reminder that business-friendly policies, government stability, and a favorable regulatory environment can make or break a corporate relocation or expansion decision.

Tax Incentives and Cost Savings

Many states offer significant tax incentives to attract businesses, ranging from property tax abatements to income tax credits and sales tax exemptions.

States such as Texas and Florida have long been favored by companies due to their no-state income-tax policies, which can be especially beneficial for high-margin businesses. For example, companies in Texas can save millions annually simply by avoiding state income tax, enabling them to reallocate resources into further expansion or reinvest in their business.

These incentives can have a major impact on a company’s bottom line. Consider the case of Toyota, which chose to relocate its North American headquarters to Plano, Texas, in 2017. The move was partially fueled by substantial tax incentives and financial grants from the state, which were structured to offset relocation costs and taxes. In return, Toyota's decision was celebrated as a win for both the company and the local government, which benefited from job creation and increased business activity.

Not to mention that many states do not include a personal income tax. This to is another big push away or exectives from high income tax states like New York, Illinois, and California to locations like Texas and Tennessee. 

Takeaways for Tenants

While poor government policies can trap businesses in a cycle of stagnation and frustration, the right location—fueled by smart, forward-thinking government initiatives—can be the rocket fuel that propels a company to new heights. For corporate tenants signing long-term leases, the decision goes far beyond square footage and rent rates. It’s about positioning your company in a city or state that offers not just a place to do business, but a springboard for sustained growth and profitability.

Evaluating a location means looking beyond immediate financial costs. The true value lies in the long-term benefits: government incentives that lower operating expenses, workforce development programs that provide access to a steady stream of talent, and infrastructure investments that enhance your supply chain and overall efficiency. In short, the right government-backed location doesn’t just reduce costs—it amplifies productivity and gives you a competitive edge that lasts for years.

A lot of these challenges stem from problems that exploded during the pandemic—shifting work patterns, crumbling urban finances, and a growing divide between thriving and failing markets. The question isn’t just where to lease; it’s how to survive and manage your portfolio in the Office Apocalypse. Download your survival guide today.