Covington’s commercial office market is recovering after the COVID-19 pandemic forced some employees into remote and hybrid work models.
The 2024 State of the Region report published by the Cincinnati USA Regional Chamber of Commerce found the Northern Kentucky office market had a 13.2% office vacancy rate during the second quarter of 2024. That’s down significantly from the 2023 report, which found that Northern Kentucky had a vacancy rate of 20.3% during the first quarter of 2023.
Moreover, an Overview of the Cincinnati Market Office published by Colliers, a global real estate analyst, found that the Northern Kentucky Riverfront had an office vacancy rate of 9.5% in October of this year. These numbers bode well for Covington, as the city’s riverfront is home to many office buildings, including the Covington RiverCenter — two of the tallest office towers in Northern Kentucky.
During the pandemic, work-from-home mandates changed how employees and supervisors conducted day-to-day business operations. Since they were no longer in the office, critical company functions had to be performed remotely, using software like Zoom or Microsoft Teams to conduct meetings or communicating with services like Slack.
Work-from-home mandates also changed how companies relate to the cities they reside in. Many companies invested heavily in digital infrastructure to bolster employees’ remote work capacity. Furthermore, some companies fully embraced remote or hybrid models, reducing the demand for traditional office space.
Now that the pandemic is in the rearview mirror, some corporations are enacting return-to-office mandates to counteract what they view as remote work’s adverse effects on in-office culture and inter-employee collaboration.
“Covington was impacted the same way most of the rest of the country was with the shutdowns,” Covington Economic Development Director Tom West said. “The social distancing had a big impact on all of our customer-facing businesses, but it also had an impact on the office market.”
In addition to negatively impacting office vacancy rates, work-from-home mandates also impacted Covington’s payroll tax revenue. Covington, which relies on payroll tax revenue to fund its government, faced a budget shortfall in 2024 after one of the city’s largest employers, Fidelity Investments, began remitting payroll taxes.
Essentially, if a Fidelity employee who works remotely has a home office in a city besides Covington, they were getting taxed in their home city rather than Covington.
Fidelity employs around 5,500 people at its office complex in south Covington. At the start of the pandemic, many employees at the Covington campus were ordered to work remotely, an edict that lasted for years.
In 2023, payroll taxes accounted for approximately 45% of the city’s general fund revenues. Covington’s payroll tax revenue declined by roughly $5 million from fiscal year 2022 to the end of fiscal year 2023.
Covington publicly discussed the situation in 2023 when finance director Steve Webb gave a presentation to the city commission, where he attributed losses in the city’s general fund to Fidelity remitting payroll taxes.
“As remote work has become normalized, these employers are now withholding and remitting portions of the occupational license tax to the jurisdictions where their employees are physically working,” Webb said in May 2023.
This devastated Covington’s general fund in 2023. For the 2024 budget, Covington used federal money through the American Rescue Plan Act, or ARPA, to compensate for the payroll tax shortfall. Unfortunately, this resulted in the city diverting ARPA funds from other initiatives it was originally earmarked for, such as public Wi-Fi, parking, parks and recreation, and affordable housing.
“Given the fact that our budget is driven largely from a revenue standpoint by payroll taxes, once companies like Fidelity started shifting the payroll withholdings from the home location of Covington to wherever people were actually working from home, then we saw a pretty significant impact on our budget,” West said.
In September, Fidelity began requiring its U.S. employees on hybrid work schedules to work in the office for two weeks out of every four-week period, doubling the previous requirement of one week. West said Fidelity’s policy has helped Covington’s office market, but the recovery is still ongoing.
Michelle Klingenberg, a managing director at real estate firm JLL, told LINK nky that companies are investing in office amenities to entice employees back to the workplace.
“Companies are spending more money to make their office situation better than any work-from-home environment,” Klingenberg said. “It’s going to be highly amenitized. They will pay more per square-foot to have their office be the greatest and best – higher than any competition – in order to recruit and retain their high talent.”
In the Greater Cincinnati area as a whole, Klingenberg said that while working in an office may look and feel differently than before the pandemic, it’s here to stay, and corporations are willing to spend money to make it happen.
“Office is back, it’s just different,” she said.
This article features reporting from LINK nky’s Nathan Granger.
