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Boston Mayor Michelle Wu’s dealings with the city’s real estate executives over the last two years can hardly be described as a lovefest.

But in the wake of the mayor’s proposal last week to effectively hike taxes on struggling office buildings and other commercial properties, the already strained relationship between the progressive Boston mayor and some of its leading movers and shakers has suddenly hit a new pocket of turbulence.

To say there was some friction between the mayor and some of the city’s leading real estate players during her first two years in office would be an understatement.

Wu championed an array of proposals that raised the hackles of more than a few developers, from a push to bring back rent control – even in a relatively mild form – to the rollout of tougher new energy efficiency rules and more costly affordable housing requirements.

A seeming reluctance to have one-on-one meetings with developers early in her term was taken by some in the real estate business as a sign of hostility.

Yet things looked like it might at least be stabilizing, even evolving into a degree of mutual respect this past fall.

Good Feelings Fade

After doing a great impression of being tone deaf, Boston’s famously musical mayor appeared to be finally responding to a cue from the dramatic shift in market conditions that has left plans for new, desperately needed new housing stuck on the drawing boards.

With the 2022-2023 surge in interest rates having killed financing for new projects, Wu floated plans in a speech to the Greater Boston Chamber of Commerce for a substantial tax abatement program aimed at helping stalled apartment and condominium projects get back on track.

The Wu administration also forged ahead with an effort to streamline the often lengthy and unpredictable approval process for major real estate projects, something developers have spent years pushing for.

The good feelings, though, did not last. Wu certainly seemed to signal that she would roll out just such a new program to help stalled housing projects at her State of the City Address in January.

But the speech came and went with no mention of the tax-abatement program, leading to a lot of head scratching and befuddlement among business leaders.

Wu told reporters after her speech that she had decided to put plans for the tax abatement on hold. A report by Harvard economist Ed Glaeser, commissioned by the city, had questioned whether it would be worth forgoing more than $300 million in potential tax revenue for at most 1,077 new units of housing out of the over 20,000 approved in recent years but not built or financed.

Wu’s hesitation, though, stood in stark contrast to New York Gov. Kathy Hochul, who announced plans to revive the Empire State’s famed 421a tax abatement plan the Wu administration had been inspired by initially – and which has been credited with spurring construction of 117,000 new housing units.

As disappointing as that may have been, Wu’s latest real state initiative has been a true shocker for the city’s real estate sector, provoking reactions ranging from dismay to anger.

A Counterproductive Surprise

Wu’s declaration Thursday that she is determined to protect Boston home and condo owners from potential tax hikes was not the surprise.

Rather, the shock came from her retrograde and counterproductive plan to make up for potentially $1.5 billion in cumulative tax revenue – according to an estimate by the Boston Policy Institute and Tufts University – that would have to be shifted from office towers and other commercial properties to Boston homeowners between 2025 and 2029, all while there’s been a dramatic slowdown in new growth from projects getting built.

For Wu’s plan is to do nothing short of doubling down on demands for even more tax revenue from what is now clearly an ailing sector, with a proposal to get state legislative approval to hike tax rates on half empty office high-rises and commercial buildings.

It is true that the mayor is taking a page from the late Mayor Thomas M. Menino, who convinced the state legislature in 2003 to allow the city shift a similar amount of its tax burden onto commercial properties after the dotcom bubble burst.

But the hit to the city’s commercial tax base then, while not insignificant, is nowhere near as severe as what the city faces in the wake of the shift to remote work.

Two decades ago, city officials were faced with either having to cut over $100 million from the city budget or hike rates for either homeowners and landlords.

The mayor said during a press briefing Thursday that her team is modeling a broadly similar dollar figure that would fall on the shoulders of residential taxpayers this time around if Beacon Hill doesn’t give the city permission to shift it onto commercial property owners. But the dollar amount could get up to “hundreds of millions” depending on different factors, said Ashley Groffenberger, the city’s chief financial officer.

Past mayors have used new construction, like these apartment, condominium and office towers in Boston’s Seaport District, to grow their way out of financial problems. iStock photo

Mayor Sugarcoats the Pill

The mayor and her top aides did their best to sugarcoat the bitter pill at that meeting with the local press.

While the proposal would enable the city to raise commercial tax rates, building owners would still probably wind up paying less under the plan than they had before – because their building are worth a lot less now, than they were a few years ago.

However, for owners of half-empty office buildings, that’s small consolation, for it will still leave them paying significantly higher taxes than they otherwise would on dramatically depreciated properties.

The mayor also made it a point to roll out a few prominent players from the real estate industry at the briefing, in an attempt to create the impression of strong business community support.

The only problem is that HYM chief and Bulfinch Crossing developer Tom O’Brien is not a big commercial landlord – he builds stuff rather than renting it out to other people.

The other main real estate figure on hand to endorse the mayor’s proposal was an executive with Winn Development, one of the city’s largest landlords, which would see its own tax bills soar without a shift in the tax burden to commercial property owners. (Apartment buildings get taxed at the same rate as houses and condos, while offices, labs, warehouses and shops get the commercial rate.)

Real Estate Industry Pushes Back

Major real estate industry groups, whose role is to provide a venue for members to express concerns without fear of political retaliation, are singing a different tune.

Both the Greater Boston Real Estate Board and NAIOP Massachusetts have pushed back hard against the mayor’s proposal.

To his credit, O’Brien, who once, roughly a quarter century ago, served as head of the City Hall’s development arm and oversaw the planning for what would later become the Seaport District, put in plea for the mayor and her staff to also focus on fostering new growth that would expand the city’s tax base with housing and presumably new commercial buildings as well.

It is the tried-and-true formula that Menino and Mayor Marty Walsh used to keep the city’s coffers filled.

Yet while Wu had been a strong supporter of building more subsidized housing, she has taken a significantly more skeptical view of the epic development boom that has transformed Boston over the past three decades.

Scott Van Voorhis

Wu’s Lip Service to Key Tool

Fielding questions from reporters, Wu paid lip service to the idea of new growth as a way of easing the city’s looming revenue crunch.

But her heart certainly doesn’t appear to be it.

“We have a very historic and already developed city in many ways – it’s different from other cities in other parts of the country,” Wu said.

Wu then went on to make a pitch for her efforts to revamp City Hall’s development review process for new projects, which she contends will help developers get projects approved and into the ground faster.

That remains to be seen, but it was cold comfort for the hard-hit owners of Boston’s office and retail buildings and, for that matter, their tenants. Restaurants and other small businesses are often on the hook for taxes thanks to triple-net leases – around 12 percent of the buildings commercial brokerage Colliers tracks.

For as it stands now, they are potentially staring at a big increase in their tax rates and rents at the worst possible time.

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.

Correction March 31, 2024: Due to an editing error, this column’s original subheadline incorrectly stated the potential size of the current tax proposal relative to an early 2000s precedent. The current proposal would increase the commercial-industrial sector’s share of the total tax levy from 175 to 200 percent, the same as Boston’s tax shift from 2004 to 2008. Due to a reporting error, an earlier version of this column mischaracterized statements Mayor Michelle Wu made in a Boston Globe op-ed. This column was also updated April 1 with additional information from the Wu administration about the financial impact of the mayor’s proposal on residential and commercial taxpayers.