By Greg Ryan
The office-market meltdown in downtown Boston is about to enter a new stage.
Many landlords have accepted the harsh post-pandemic reality that their buildings have fallen in value, so much so that they are willing to argue as much to the city to try to cut their tax bills, according to property owners and firms that serve them.
The lower the city assesses a building’s value, the less its owner pays in taxes. This is the year, experts predict, that building owners and managers will apply for property-tax abatements in significant numbers, in a way they have not since Covid-19’s arrival. The challenges will pit landlords fighting to find savings in a tough financial environment against a city that relies on property taxes for nearly three-quarters of its annual budget.
“It’s gone from, ‘Maybe we should do this,’ to, ‘We should do this,’” said Chris Froeb, the leader of the law firm Nixon Peabody’s real estate practice group.
Landlords are making their decisions now. They recently received assessments on their properties from the city for fiscal year 2024, and the deadline to apply for an abatement is Feb. 1. Small commercial buildings are on the hook for tens or hundreds of thousands of dollars a year in property taxes, with the city’s largest skyscrapers responsible for well over $10 million.
A city’s assessment of a property is often below its appraised value in a potential sale, but right now the city’s numbers are dramatically out of step with their value on the open market, experts believe. While many assessments are down for the first time in years, if only slightly, downtown commercial properties as a whole actually saw a small increase in assessed value from last year, according to city-provided data.
That’s hard for many to square with the handful of office sales that have taken place in Boston in recent months. City Realty Group, for instance, paid $11 million in October for a Leather District building that the city assessed at $17.3 million. The gulf between those numbers represents an extra $160,000 or so a year in property taxes. That’s one address among hundreds downtown.
There are a few reasons for the discrepancies. The city assesses properties on a lag: The numbers that just came out reflect perceived values as of January 2023. Officials have incentive to not only keep assessments higher because it means more tax revenue, but to refrain from giant year-over-year changes in either direction in order to keep income stable.
But landlords have reasons of their own for deciding now is the right time for a challenge. Chief among them is that sales in the downtown office market have finally started to thaw, with sellers taking a steep loss on several transactions. That amounts to cold, hard proof of fallen values. It’s not only offices: With the demand for lab space falling off, other types of commercial real estate have taken big losses in transactions, too.
Multiple downtown landlords, speaking on the condition of anonymity because of what they consider the sensitive nature of the proceedings, said they plan to apply for tax abatements this year in a way they have not in the past. One landlord has filed a handful of abatement applications the past few years, but in 2024 expects to file “on most of our properties.”
Real estate services firms are preparing for more abatement work: Cushman & Wakefield, for instance, is now ramping up its tax practice, said Rob Skinner, the firm’s New England managing principal.
“Everyone knows that it’s down,” Skinner said of building values. “No one will agree how much.”
West Street, a Downtown Crossing block stocked with older commercial buildings, offers another example of the differing perspectives of city assessors and investors in the market.
A firm named Kendall Capital paid $4.1 million in September for two adjacent buildings on West. The city has assessed the sites at a combined $7.3 million, based on its perceived value as of early last year.
That means the buildings sold for 44% less than their assessed value. Every building presents different circumstances, but by comparison, in reassessing all of the buildings on West from fiscal 2023 to 2024, the city decreased their collective value by 2.3%.
To be sure, market value is not down dramatically in every building downtown, especially the top-flight towers still mostly leased up. And from the city’s perspective, downtown is just one piece of the fiscal puzzle. Based on city assessments, the vast majority of commercial real estate value in Boston is located outside the neighborhood. While downtown assessments were essentially flat year-over-year, commercial values across Boston grew by 3.7%, to $63 billion. Citywide residential values make up a larger slice of the pie at $147 billion, up 4% from fiscal 2023, though homeowners have a lower tax rate.
Still, even a small decrease to the $8.8 billion in commercial real estate assessments downtown could have real budgetary ramifications. (The city compiled downtown assessment values for the Business Journal by examining Downtown Boston Business Improvement District parcels.) Properties outside downtown won’t be immune from challenges, either.
While the city’s overall assessed values have increased, “the real story is one of neighborhoods,” said Martha Walz, interim president of the watchdog Boston Municipal Research Bureau. Some like the Seaport are thriving, she said, while others like the Financial District are struggling.
“Absent clear strategies to address this, we can expect downtown values to decline again in the future,” Walz said. “This will have a substantial negative impact on the city’s revenue, and that should concern all of us.”
This year’s abatement battles will play an important role in determining the fiscal picture downtown. The city’s assessing department decides the challenges, though landlords can appeal the ruling to a state tax board.
“All of our clients are strongly considering whether they should appeal their city taxes,” Froeb said. “It’s front of mind for everyone I work with.”