Shrinking Office Building Values Are Becoming a Dilemma for City Budgets

Shrinking Office Building Values Are Becoming a Dilemma for City Budgets

The sharp decline in office building values is likely to become a growing problem for the budgets of cities, schools and other jurisdictions that depend heavily on property taxes from these building owners.

Most municipal budgets haven’t suffered much yet. For a variety of reasons, declines in property values typically take years before they are reflected in the real-estate assessments of most taxing jurisdictions.

But municipalities might soon start feeling pain, say lawyers and appraisers throughout the country. Property tax is the largest single expense for most office landlords. Many hope to reduce it to help offset lost revenue from the sluggish return of employees to their desks and the cascading damage it is causing to local businesses catering to these workers. More recently, job cuts in the tech sector are reducing demand for workspace. 

In jurisdictions that reassess property values annually, owner appeals of tax assessments are up 30% to 40% compared with a typical year before the pandemic, said Bryan Frey, a managing director in the valuation consulting business of CBRE Group Inc.

Carr Properties, a big owner of office buildings in the Washington, D.C., region, is among the owners looking to appeal its property values. The D.C. taxing authority, which reassesses property every year, cut large office building assessed values 11% in 2021. But it raised them 3.6% in 2022, according to the D.C. Office of Tax and Revenue.

“We’re definitely appealing,” said Oliver Carr, chief executive of Carr Properties, who estimates office values are down 15% to 40%, depending on the building. “We have higher interest rates. We have less demand for space. The math just doesn’t work.”

A spokeswoman for the D.C. Office of Tax and Revenue said the district will continue to evaluate the impact of remote and hybrid work and “make any adjustments as warranted.”

If landlord appeals to cut their tax bills are largely successful, cities, school districts and other taxing jurisdictions may face some tough decisions involving cutting jobs or programs or looking for other ways to raise revenue. Many jurisdictions correct for falling commercial values by automatically increasing taxes on residential. This process is likely to accelerate in 2023 and beyond.

Vacancy rates in many business districts are near record levels.PHOTO: JOHN TAGGART FOR THE WALL STREET JOURNAL

The prospect of reduced property taxes could also have implications for the $4 trillion U.S. municipal bond market. Merritt Research Services, a muni bond research firm, warned early in February that some major cities may be particularly vulnerable to office building re-evaluations because at least 8% of their tax base valuation is concentrated in their 10 largest commercial property taxpayers. This list includes Boston, Detroit and Denver, the report said.

The danger is that economic instability and job cuts in the tech sector and other industries might intensify fiscal pressure on municipalities and eventually lead to weakening credit and, under extreme conditions, raise the risk of default, said Richard Ciccarone, Merritt’s chief executive.

“This is one you have to monitor like an asteroid you’re worried about,” he said.

Office spaces and residential dwellings in downtown Memphis, Tenn.PHOTO: JIM WEBER/THE DAILY MEMPHIAN/ASSOCIATED PRESS

Office building values are falling because most businesses are switching to remote or hybrid workplace strategies that require less space. Vacancy rates in many business districts are near record levels and landlords are being forced to offer concessions like free rent or pay for extensive interior work to attract tenants.

Higher interest rates, meanwhile, have reduced the prices investors are willing to pay for office property partly because they have increased the cost of financing deals.

Average quality office buildings have lost about one-quarter of their value since the beginning of the pandemic, according to real-estate analytics firm Green Street. Meanwhile, assessors who have started to take the pandemic into account in some cases are reducing assessed values an average of 10%, said CBRE’s Mr. Frey.

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Municipalities have been slow to reflect the shrinking office values for a number of reasons.


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For starters, about 10% to 15% of states are still basing commercial property taxes on real-estate assessments that took place before the pandemic, when occupancies were much higher and values were near record highs, Mr. Frey said.

Mecklenburg County, N.C., which includes the city of Charlotte, is in this category. Mecklenburg County’s last reappraisal was in January 2019. But a new one comes next month, according to a spokeswoman for the North Carolina Department of Revenue.

Even among the jurisdictions looking at valuations after the pandemic hit, few are recognizing major reductions, say private appraisers and tax attorneys. That reflects how values are often based on recent sales, which has been tough to do because sales activity has greatly slowed.

Others have barely factored in the pandemic period. In Colorado, property-tax assessments for 2021 and 2022 taxes were primarily based on a valuation period from Jan. 1, 2019, through June 30, 2020, covering only the early months of the pandemic, according to Thomas E. Downey Jr., a tax attorney based in Foxfield, Colo.

The valuation period that will determine assessments for 2023 and 2024 taxes will primarily be Jan. 1, 2021, to June 30, 2022, Mr. Downey said.

Assessors also analyze a building’s income when valuing office property. But cash flow can mask poor market conditions because much of it comes from long-term leases signed before the pandemic. When those leases expire, owners will likely have to reduce their asking rents because remote work has undercut office demand.

“I don’t think there are too many places where the assessors are getting out in front of this,” said J. Kieran Jennings, managing partner of Siegel Jennings, a Cleveland-based law firm that handles property-tax appeal cases throughout the country.

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