Half-Empty Office Buildings Will Likely Lead to Higher Taxes for All Property Owners

A topic that doesn’t come up often enough when discussing the future of office is property taxes. Because the money that comes into local and county governments is significant. But what will happen when office buildings’ valuations decline  because of the shifting patterns of demand?

As Danny Ismail, co-head of Green Street’s Strategic Research group, recently wrote, “The likely outcome is for commercial real estate to bear higher tax burdens via higher property taxes, transfer taxes, and potentially ‘green’ taxes. Several cities have already made this move with more likely on the way.”

Pew put together some interesting numbers on the general topic:  61% of tax income to cities and counties comes from property tax. The rest is a mix of sales tax, income tax, and some other types. In 40 states, property taxes lead revenue sources.

As the Urban Institute noted about the importance of property taxes using 2019 data: “All states have property taxes (at least at the local level). New Hampshire was the most reliant on property tax revenue in 2019, as the tax accounted for 36 percent of its combined state and local general revenues. (New Hampshire does not have a broad-based individual income tax or general sales tax). The next most reliant states were New Jersey (29 percent), Maine (27 percent), and Connecticut (26 percent). Overall, 10 states collected 20 percent or more of their state and local general revenues from property taxes in 2019.”

Municipalities and counties are largely dependent on property taxes to pay for what they must do every day. Policing, street maintenance, schools, business development, mass transit—everything. Office buildings have long been important as a funding source through property taxes, which are based on property values. And everyone in the industry knows where those have been going.

“Commercial property values have fallen in the last year given a rise in interest rates but work from home (WFH) is a particularly acute drag on denser urban metros,” Green Street’s Ismail wrote. “Barring a recovery in commercial real estate values or a shift in worker/employer attitudes towards WFH, there is a structural mismatch in how cities will fund themselves going forward. Lower assessed tax values coupled with less in-office work have and will cause damage on city budgets, local infrastructure, and overall quality of life within major cities.”

To maintain the revenue, local and county governments will look to other sources for income. A likely seeming one would be increasing tax rates on other properties, both CRE and residential.

“It’s impossible to predict the form or timing of higher real estate taxes, but the direction is clear,” Ismail wrote. “Empty offices and quiet downtowns are a negative drag on fiscal health without a quick or easy fix. Investors should expect upward adjustments in commercial real estate related taxes as long as workers prefer the home kitchen table to the downtown cubicle.”