The selloff in the tech sector has been brutal but, somewhat underreported, is the ongoing troubles with the office market. And it isn’t just the landlords who will suffer from low occupancy rates, high-interest rates, and punishing property taxes. The pain will ripple through municipalities, impacting city and school budgets as landlords are starting to contest—what they view as—bloated and unreasonable tax assessments on their properties.
According to CBRE, appeals of tax assessments are up 30% to 40% for those states that assess annually compared with a typical year before the pandemic. If successful in their appeals, expect job and program cuts, defaults in the municipal bond space, and for city governments to shift their focus on residential properties in an attempt to offset shortfalls in tax revenues. Certain cities are particularly vulnerable as nearly 10% of their tax base comes from a handful of the largest commercial property taxpayers (i.e., Boston, Detroit and Denver).
Another troubling sign is that about 10% to 15% of states don’t assess office values annually so the impact to city coffers—although inevitable—will be delayed. Perhaps one of the best ways to quantify the current pain in the office space is to look at the stock performance of two publicly traded REITS, Vornado Realty Trust and SL Green, each of which owns approximately 26 million sq. ft and 33.6 million sq. ft. of office space, respectively. In the last five years, Vornado’s stock price is down nearly 70% and SL Green’s 65%. Looking back the last twelve months is nearly as horrid for each of them and their stockholders.
Press, David Zalubowski/Associated. “Shrinking Office Building Values Are Becoming a Dilemma for City Budgets.” The Wall Street Journal, 13 Dec. 2022, www.wsj.com/articles/shrinking-office-building-values-are-becoming-a-dilemma-for-city-budgets-11670917430?mod=hp_featst_pos4.
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