The Worst 3 Cities for Your Commercial Real Estate in 2023

The commercial real estate market in 2023 looks drastically different than it did even just a year ago. With major metropolitan areas being hit hard by economic downturns, businesses are having to make tough decisions when it comes to their office leases.  

Because, from recession rumors to record vacancies, Americans haven't been able to catch a break. So, as we reflect on the overall performance of the commercial real estate industry, the best and worst cities emerge. Real estate professionals then can make more informed decisions for commercial space in the coming years, by being aware of which commercial real estate markets might not be the best fit.   

These major cities have suffered more than others in terms of critical economic drivers, including:  

• Economic growth  
• Population growth  
• Employment growth 
• Business growth 
• Crime growth 

So if you’re considering relocating or expanding your business in the coming year, read on to learn what you need to know about the worst cities for your commercial real estate locations. The data may also make you think twice before renewing your expensive office lease in one of these places.  

1. San Francisco 

San Francisco is one of the worst cities for CRE entering 2023, but this should come as no surprise.  

The Bay Area’s tech crutch and its historic office vacancies are the two largest cracks in San Francisco's foundation. Now, couple this with the fact that affordable housing is rare despite home sales dropping by 13% this year, according to CBS. Additionally, the high interest rates combined with San Francisco's already unaffordable home prices have resulted in a mass exodus of residents since the pandemic began, driving down property values even further. Do you think great employees will want to put themselves in such a wounded housing market? 

Population growth has been nonexistent in recent years. Given the freedom to work from anywhere, most professionals (especially in the tech hub) fled to more economic friendly regions. The rapidly dwindling California population growth rate points to a dark future for the state. This is highlighted even further by the completely historic drop in office utilization.

Brace yourself. San Francisco's office vacancy rate shot from 4% to 32%. 

Accordingly, employment growth in the tech industry is now occurring in alternate, more affordable real estate markets like Texas. Learn more about The Best Cities in Texas for your Business.  

Not only is San Francisco unaffordable, but citizens have also called the city dangerous and unsanitary. Rising crime and homelessness reached a breaking point in 2022, as that the city publicly voted to recall their district attorney. Record crime rates are even being sidelined to a growing human excrement problem. "An SFGATE review of case data found that there were 13,856 reports of human or animal waste in the city between Jan. 1 and July 12, which is down from 16,547 reports of feces over the same time period in 2020."

So, one of the most expensive cities in the country is suffering the same fate one may expect in a third world country. 

"It goes to show the big disparity between the haves and the have-nots in a place like San Francisco, where startups make their dreams come true while the homeless people continue to live in a nightmare."- Medium

With so many issues weighing on San Francisco’s commercial real estate market and no clear end in sight for these problems, it is difficult to see this city as a viable option to search for office buildings. 

2. New York City  

New York is one of the most expensive cities in the world and its high cost of living has made it an unappealing destination for many businesses. The sky-high prices of office spaces, coupled with New York's already high taxes and cost of living, make it one of the worst cities in America for commercial real estate. 

First off, New York's office rent is unreasonably expensive. The going rate for office spaces in New York is almost double the national average, with a typical Class A building costing $80 / square foot. However, certain premium buildings even go for $300 / square foot. Learn more about The Manhattan CRE Rent Crisis.  

Further compounding this issue are New York City's taxes, which are among the highest in the country. The combined sales tax rate (City, County, and State) is 9.25%, while the top bracket of earners have an income tax of 14.78%. To make matters worse, businesses are hit with a corporate income tax of 6.5%. All this culminates in the fact that New York population growth has stalled completely, and with it so has job growth.

This is indicative of a greater phenomenon. While cost of living skyrockets in cities, the demand for commercial real estate has dwindled. In the last two years, NYC lost 5,200 private businesses. However, it doesn’t end there.

To make it worse, New York City has become somewhat notorious for its rising crime. Most recently, businesses have been forced to close storefronts and shops due to fears of safety. Fatal and unprovoked attacks across the city are on the rise. As a result, NYC natives no longer feel safe- especially on public transportation. 

When you consider the high cost of office space and New York's taxes, it becomes clear why NYC is the second worst city in America for commercial real estate. 

Businesses looking to save money should look elsewhere. However, if you are still sold on locating your business in NYC, a True Tenant Rep™ can help you get the best price in a tough market. By leveraging their market intelligence, you'll get a better deal, but the techniques can be utilized in any market. Enroll in the free course below to empower yourself and your business to get the best deal on office space.

3. Chicago

Chicago has become the third worst city for commercial real estate in recent years due to a combination of factors.  

Illinois’s high taxes, complex regulations, and its overall difficult business environment have been some of the main reasons why large companies like Boeing, Caterpillar, and Citadel have chosen to relocate their corporate headquarters away from the state. Employment growth across the board is on shaky ground. Fortune 500 Companies are Leaving Illinois, Should You Join Them?

The overall tax burden on businesses located in Chicago is among the highest in the nation, with property taxes that are significantly above the national average. In fact, Chicago's commercial real estate taxes are the third highest in the nation. This is due to a combination of high property taxes, sales taxes, income taxes, and other fees levied on businesses in the city.

The high cost of commercial real estate in Chicago makes it difficult for businesses to succeed in the city, as they must absorb the high tax burden and pass it on to consumers. 

This has resulted in a decrease in the demand for commercial real estate as companies are no longer looking for office space in Illinois. Additionally, with the rise of crime, lack of economic resources, and diminishing talent pool, Chicago’s commercial real estate market is suffering from a lack of investor confidence.

The crime is scaring away the city’s natives, making Illinois among the states with the worst population growth and most outbound moves.  

This has caused the value of Chicago properties to drop significantly, while vacancy rates to increase.  

Furthermore, businesses that are already established in Chicago have very few incentives to stay, given that many other states offer more attractive tax rates.  

All of these factors have contributed to making Chicago the third worst city for commercial real estate in recent years. Employment growth is occurring in other business-friendly states. Learn the Top Cities for Your Commercial Real Estate in 2023. 

Avoid the Worst Cities for Your CRE 

As major cities face economic uncertainty, commercial real estate professionals must be aware of the markets to stay far away from 2023. San Francisco, New York City and Chicago have all been identified as three worst cities for commercial real estate going into next year. But, this is not completely surprising. 

In the last few years, the divide between cities that are good and bad for business has become further than ever. Those located in business-unfriendly cities and states are losing millions to overhead costs that they could be retaining. So if you need help relocating or considering your options, you can work with a True Tenant Rep^™ at iOptimize Realty^®. As experts of relocation with over 30+ years of experience helping corporate clients save millions, we are prepared to find the optimal office space in the right market, for the right price. So whether you want to move your office down the street, into the suburbs, or across the country, you can do so worry free. 

Enroll in the free course below to learn how to find your next office space for the best price. 

Talk to a True Tenant Rep^™ at iOptimize Realty^® today.