Plunging Office Values Expected To Sap $464M From D.C. Tax Revenue

Remote and hybrid work are already having a dramatic effect on Washington, D.C.'s finances, with tax revenue projected to fall by almost a half-billion dollars over the next four years as a result of property values and transactions nose-diving.

This reduction in real estate tax collections will cause a projected $464M drop in the District's locally sourced revenues over the next three fiscal years, D.C. Chief Financial Officer Glen Lee wrote in a letter Tuesday. 

"The expansion of remote work, coupled with higher interest rates, pose a serious long-term risk to the District’s economy and its tax base," Lee wrote in the letter. "Tax revenue from commercial properties in the District, particularly large office buildings valued over $50 million, significantly declined in the past fiscal year and was the main reason for the reduction in overall real property tax revenue in FY 2022."

The letter was addressed to Mayor Muriel Bowser and Council Chair Phil Mendelson. In a statement Tuesday, Bowser called the forecast "sobering" and said it will require the city's leaders to make difficult choices. 

"With the ongoing impacts of telework and national political uncertainties, we face another significant test to our local economy," Bowser said. "Given these challenges, it would be fiscally irresponsible to try to tax our way to sustainable, long-term growth."

The CFO revised his projections for D.C.'s property tax revenues downward by $53M for fiscal year 2024 and by $105M for each of the three following years. Those figures encompass all properties, but the forecast for residential properties actually increased by 3% over that period, while revenue from commercial properties is projected to fall by 0.6% each year.

The commercial segment also includes hotels, retail and restaurant properties, which the CFO expected to continue recovering in value. 

"This growth is expected to be more than offset by a deeper loss in tax revenue from office properties," Lee wrote in the letter. 

Tax revenues from real estate transactions, a separate category from property taxes, are "drastically lower than last year," Lee said in the letter. 

D.C.'s deed taxes so far this fiscal year, which began Oct. 1, are down 48% from the prior year, the CFO's letter said. It revised the projections for deed tax revenue down by $143M in FY 2023 and by $111M for each of the three following years. 

Lee said the previous fiscal year that ended Sept. 30 had a number of $50M-plus commercial office sales that helped drive higher tax revenues. 

"Such transactions have largely been absent this fiscal year," Lee wrote. "The deteriorating real estate market, higher mortgage rates and declines in housing sales have all contributed to this decline."

D.C. is facing record-high office vacancy rates, with more than one-fifth of its buildings unfilled and with tenants giving back more than 1M SF last year. Many companies — not to mention the city's largest office tenant, the federal government — aren't fully utilizing their offices: Kastle Systems' latest report found that D.C.'s buildings reached 46.6% of pre-pandemic occupancy last week, below the national average of 50.1%. 

The revised revenue projections come after several of D.C.'s top commercial real estate owners wrote a letter to local officials in November raising alarms about the risk of distress in the city's office market. The letter raised concerns that D.C.'s revenue projections, up to that point, hadn't accounted for falling office values, and that the city could face major budgetary issues if it doesn't address the disparity. 

“They need to wake the hell up and do things differently, because the way they’re doing things now, it could lead to economic disaster, frankly,” Paul Dougherty, principal of developer PRP and one of the signatories of the letter, told Bisnow in November. 

As a result of the declining revenue projections, the CFO said D.C. doesn't meet the funding criteria necessary to enact a new program the D.C. Council passed in December to provide free bus service within the city, a policy that was set to go into effect June 1. 

Mendelson and Council Member Charles Allen pushed back against this move from the CFO in written statements Wednesday.

“After my briefing on the revenue estimates yesterday (in which the CFO did not choose to mention fare free buses) the CFO released the revenue estimate which backs out the funding that the Council set aside for fare free buses,” Mendelson said in a statement. “I, together with Councilmember Allen, have asked the Council’s General Counsel and Budget Director to look at the legal basis for CFO’s actions in the revenue estimate.”