Boston Projected To Face $1B Tax Shortfall From Struggling Office Market
As hybrid work and high interest rates lead Boston's office valuations to plummet, expected tax revenue losses are beginning to come into focus.
Office values are expected to fall roughly 30% by 2029, leading the city to lose a total of roughly $1.5B in revenues in the next five years, according to a new report from Tufts University's Center for State Policy Analysis. Commercial properties are expected to see an overall 18% decrease in valuation.
If there are no significant improvements to office vacancy, the city's tax collections will reach a "new normal" with annual collections expected to be $500M below the current level in 2029 and the years to follow, the report says.
Greater Boston Real Estate Board CEO Greg Vasil said the Tufts report shines a light on how dire the economic situation is for the city and why officials need to take action now.
"For far too long commercial real estate has funded Boston’s operations at a high level," Vasil said in an emailed statement. "Covid and a new work routine have changed that dramatically, and the tax revenue will decline."
The city heavily relies on property taxes to fund law enforcement, city workers, and public works and amenities.
In fiscal year 2023, roughly 22% of Boston's total budget, or $882M, came from office buildings, city officials told Bisnow in June.
This dependence is uncommon in other major markets. In Chicago, Miami, New York and D.C., commercial property taxes make up between 5% and 15% of city revenues, according to the report. This is largely due to their reliance on local sales and income taxes.
There aren't many avenues to fixing this problem. As the state has widely forbidden the use of sales and income tax for revenue, the city's only plausible solution seems to lie in raising residential property taxes.
However, the report goes on to say that the city would need to raise taxes by 30% to make a meaningful difference, something that could have negative impacts on homeowners and multifamily landlords.
Although building valuation drops haven't materialized yet, they are expected to once commercial property assessments are adjusted.
Office landlords began to take the matter into their own hands before the Feb. 1 deadline to file tax abatements passed. Landlords filed with the city to slash their tax bills on properties with high tax assessments that don't reflect the reality of the market, the Boston Business Journal reported.
Thomas Jensen, executive director of Boston Appraisal & Consulting LLC, told Bisnow in June he expects Boston's older office stock to see tax assessments slashed by 40% to 50% compared to their 2021 levels in the coming years due to rising vacancy.
The city has made an effort to revitalize Boston's downtown through tax breaks for office-to-residential conversions, but residential buildings aren't as valuable from a tax perspective, leading to a permanent decrease in tax revenue, according to the Tufts report.
