Just when you thought the office market implosion couldn’t get any worse, then it does.
The Boston Policy Institute made waves earlier this year when it predicted that the office market collapse would trigger a major revenue crisis at Boston City Hall.
The report by BPI was downplayed and criticized initially by city officials.
That has since changed, at least in the sense that the Wu administration has acknowledged the problem and is pushing a tax plan to plug a looming revenue gap.
Boston Mayor Michelle Wu is now lobbying for state approval to shift more of the city’s tax burden on commercial property owners, and held the first of two of what will reportedly be a series of town halls with residents last week.to promote her plan and rally them to her side
That, in turn, would enable the city to attempt to squeeze more money out of struggling downtown office buildings than the city would otherwise receive given their cratered values.
The mayor’s tax plan would also smooth out what is now projected to be a 14 percent annual tax hike for city homeowners, reducing it to 9 percent.
Office Values Dropping More than Expected
Wu’s plan has generated a lively debate, with counter proposals put forth by business leaders and groups that call for the city to limit tax hikes by instead trimming spending and dipping into reserves.
However, gone unnoticed amid all the heated back and forth are signs that the underlying problem – the decline in office building values – may be even more serious than first thought.
The Wu administration earlier this month finally released details on the potential tax hit city homeowners and commercial property owners may soon be facing.
And city officials noted they had based their numbers on a projected 7 percent decline in commercial property values.
On the surface, that doesn’t appear to be a particularly stunning number, in part because commercial property is a wide segment that includes not just office towers, but also lab and retail space as well.
Yet the number did not escape the notice of Greg Maynard, executive director of BPI.
That 7 percent decline is roughly double or more the 2 to 3 percent drop in commercial property values that BPI had predicted for the first year of what it expects will be a years-long decline.
Based on those projections, BPI triggered alarms when it estimated the city could face a $1.2 billion to $1.5 billion revenue gap over the next five years.
Now with the initial city numbers coming in much higher, Maynard said BPI’s estimate of the potential revenue gap facing could actually be on the low side.
A Bigger Budget Gap?
Maynard declined to offer any ballpark numbers on how much higher that potential revenue gap could grow.
But he acknowledged that it could go north now of $1.5 billion, depending, of course, on what happens with commercial property values in Boston in the coming years.
“That 7 percent decline in Boston commercial property values is dropping much faster than BPI predicted,” Maynard said. “There is every reason to believe commercial property values will continue to decline for years to come.”
Overall, the decline in office building values in Boston is nowhere near done and is not likely bottom out until 2029.
And that means the debate over how to deal with the loss in office building tax revenue may be closer to the beginning than to the end and will continue to rage for years to come.
Green Shoots in the Data
Of course, that is predicated on the idea that the shift to remote work, in which employees only spend two or three days in the office, remains the dominant pattern. Second-quarter data from Placer.AI said a greater share of Boston workers had gone back in the office than any other metro in the country over the previous 12 months.
Third-quarter data from Colliers also sounded some hopeful notes: Boston’s now in its second consecutive quarter of falling office vacancies – even if the most recent decline was only half a percentage point.
As summer has turned to fall the past couple of years, there have been rumblings that major companies may be preparing “return to work” campaigns to aimed at getting employees back behind their desks.
During a media tour of its new Back Bay headquarters Thursday, it came out that CarGurus plans to up its in-office requirement to 80 percent of employee’s workweeks.
And Amazon recently announced that it would be requiring employees to return to the office five days a week.
Be Skeptical of Optimists
However, you take the announcement by the online retail giant at face value at the risk of looking foolish.
Amazon is a notoriously brutal employer, so some observers were soon noting that the announcement may have simply been an attempt to prod some less-committed employees to quit and spare the company the time and expense of laying them off.
The amount of empty space in cities across the country – as in space, whether it is officially leased or not, that is devoid of human beings – has remained stuck at around 50 percent for a few years now, according to surveys by the Kastle Group.
That Colliers report still put Boston’s overall office vacancy rate at an unhealthy 23.5 percent – 26.1 percent among unpopular class B buildings citywide and a painful 27.3 percent across all types of office buildings downtown.
“It’s an uphill battle to get people back to work,” Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, said at a Boston City Council hearing on Thursday.
Horowitz’s center produced BPI’s report on the fallout from the shift to remote work on Boston’s office market and city finances.
“People are going to continue to work remotely and we are not going back to a time when offices were as useful to businesses or as valuable to them,” he said.
Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.