If office real estate owners and investors needed someone else to feel urgency and pain, perhaps this is their moment. The process of property assessment is usually not particularly dynamic. When assessments are headed higher, not only do tax collections increase, but the investor can feel good that their property is believed to be more valuable by someone else who pays attention. But on the rare occasion that assessments head in the other direction, well, things get a little messy.
To suggest this is rare is an understatement. In fact, the more of a city’s revenue is derived from property taxes, the more stable it is considered to be by Standard & Poor’s. Cities like Boston, Washington DC, and Austin lead in this category. But what happens if the office buildings which typically carry the highest tax burden, aren’t occupied? Can local governments continue to assess those buildings as if nothing has changed as a result of the pandemic? What about the changes in interest rates?
Clearly, the office sector is having a very difficult time, and it’s not surprising that owners and investors would be looking for some relief in their operating costs. But can municipalities afford to collect less in taxes? And how do they guess how much the assessment should fall with so few transactions taking place? These are difficult questions for sure, but they need to be answered. If they’re not, the answer will be determined by a bankruptcies. The faster the municipalities move on this, the more likely they are to prevent that from happening.
The municipalities are obviously not looking to decrease their revenue base, and frankly, few of them can afford a single dollar less in collections because of their fiscal programing and entitlement activities.
The answer to this problem is far from perfect, but it is obvious… especially here in the Washington DC area. It’s time to require public employees to go back to the office in person. We’re not scared of COVID anymore, and the need to communicate with colleagues still exists. The infrastructure is there and underutilized. Municipalities can help investors and themselves at the same time.