Municipalities and school systems that depend on property taxes to fund their budgets may face shortfalls due to the plunge in office values—especially in cities that do annual property assessments—as more and more building owners appeal their assessments.
In jurisdictions that reassess property values annually, owner appeals of tax assessments are up by as much as 40% compared to pre-pandemic levels, Bryan Frey, a managing director in CBRE’s valuation consulting business, told the Wall Street Journal this week.
Carr Properties, which owns a large portfolio of office buildings in Washington DC, told the Journal it would be appealing this year’s assessment from DC, which cut large office building assessed values by 11% in 2021, but raised them 3.6% in 2022.
“We’re definitely appealing. We have higher interest rates. We have less demand for space. The math just doesn’t work,” CEO Oliver Car told the WSJ.
Carr was among a dozen major DC owners and operators of office buildings who signed an urgent letter to city officials last month warning them that cratering office values in Washington are a threat to the fiscal health of the city.
The letter suggested that city officials, who included a tax increase on commercial property in their latest budget, may be underestimating the number of distressed office properties in DC. The CRE firms asked to be part of a process reviewing how the city calculates its assessments of office buildings.
“Our interest in this matter is not about being overtaxed. We are primarily concerned about the future fiscal health of the city. For every decline of $100 million in commercial property tax assessments, annual property tax revenue falls by $2 million,” said the letter, which was cc’d to Washington’s mayor and city council.
“It is vitally important for city officials to fully comprehend the difficult environment commercial office buildings are operating under and the risks to future tax revenue,“ the letter said. “With the dramatic and persistent decline in commuter activity, and flight out of high-cost employment centers precipitated by remote work, the office market in downtown DC is experiencing significant setbacks,”
The letter was signed by a bevy of CRE firms with significant DC office assets, including JBG SMITH, Boston Properties, Trammell Crow, Hines, Brookfield, Carr Properties, and Hoffman & Associates.
A spokesperson for the DC Office of Tax and Revenue told the newspaper that the city continues to evaluate the impact of remote and hybrid work and will “make any adjustments [to office valuations] as warranted.
The Journal report noted that many jurisdictions automatically increase taxes on residential properties to compensate for falling commercial values, a process the report said would accelerate in 2023.
According to Merritt Research, a municipal bond research firm, cities that are more vulnerable to plunging office valuations—because more than 8% of their tax base is concentrated in their 10 largest commercial property owners—include Boston, Detroit and Denver.
According to Green Street, average quality office buildings have lost about a quarter of their value since the beginning of the pandemic.
CBRE’s Frey says municipalities that are factoring the impact of the pandemic into new assessments are reducing valuations by an average of 10%. Up to 15% of US states are still basing commercial property taxes on pre-pandemic assessments.
Earlier this year, an NYU study projected that office valuations may drop by as much as $500B by the end of this decade, GlobeSt. reported.
CBRE’s Q3 office market report for DC cited “dismal market fundamentals,” including 351K SF of occupancy loss, bringing YTD negative net absorption to 976K SF. Vacancies increased 40 bps in Q3 in DC—they’ve surged 580 bps above pre-pandemic levels—surpassing the 20% threshold for the first time, at 20.3%.