33-41 West St. in Downtown Crossing recently traded for $4.1 million, down from the $16 million it fetched just a few years ago. Banker & Tradesman file photo

The recession of 1990-91 was one of the mildest downturns to hit the U.S. in modern history, lasting less than a year. But in New England, the downturn felt much more like a depression than a recession, as it triggered a massive collapse in commercial real estate values.

And the experience of those trying times may be more relevant now than they have been in years as the shift to remote work threatens to severely undermine, if not devastate, a large section of the commercial real estate market.

The boom times of the 1980s led to a huge run-up in commercial real estate values, from downtown office towers to more modest buildings in the suburbs, with the surge in values fueling a rash of speculative development projects and ill-thought-out loans from banks. And when the bubble burst, it was painful, with office towers and commercial real estate values crashing and venerable local banks going belly up.

Cities, suburbs and towns felt the aftershocks keenly.

The run-up in commercial real estate helped fill local tax coffers. When that source of funding dried up seemingly overnight, there was hell to pay as local and city officials were forced to boost taxes on homeowners and slash municipal and school budgets.

Offices Leased, but Empty

In the wake of the pandemic, and the sweeping restructuring of the rhythms of the work world it has led to, we may very well be seeing once again a slow-motion real estate disaster play out.

Downtown Boston is likely to be center stage for the coming implosion this time, with wide-ranging ramifications for the city’s finances, from the school budget to social services to maybe even residential tax rates.

While top-shelf, Class A office towers seem to be holding on, downtown’s many older, Class B office buildings face a much grimmer future.

Certainly, the official vacancy rate in Boston’s office market has gone through the roof – it’s now in the 20 percent range, a level only typically seen during a steep downturn or recession.

But the amount of space that is simply empty, with no tenants, even if it is officially leased, is staggering. The amount of empty office space in Boston was pegged at between 30 to 50 percent earlier this year.

Over all office buildings and towers in the largest U.S. cities remain have occupancy rates stuck at around 50 percent, meaning they are literally half empty. It doesn’t take a rocket scientist to figure out that half-empty office buildings are worth far less money than mostly full ones.

One need only look at the recent space of older office buildings in Boston selling at steep discounts, such as 33-41 West St. in Downtown Crossing, which recently traded for a measly $4.1 million, down from the $16 million it fetched just a few years ago, as Banker & Tradesman Commercial Real Estate Editor Steve Adams reported.

Fewer Tax Dollars in New Construction Too

That’s more than bad news just for office building owners and investors. Over the next few years, that downturn spiral in the value of downtown office buildings is likely to be even worse news the city’s finances.

Real estate attorneys were busier than they had been in years last February filing tax abatement applications on behalf of office building owners. As we head into 2024, we are likely to see an even bigger jump in abatement applications as office building owners, left without tenants, seek big reductions in both the assessed value of their properties and, of course, the amount they have to pay to the city.

Compounding matters, construction on new housing and on new commercial and lab buildings has also slowed, meaning there will be fewer tax dollars coming in from new projects.

Meanwhile, on the expense side of the ledger, the cost of everything from policing the streets to educating children continues only to grow in Boston, with a potentially budget-busting police contract waiting in the wings.

Scott Van Voorhis

It may take another year or two before the impact of suddenly diminished downtown real estate values on city tax coffers becomes apparent. But sooner or later, the truth will emerge in the form of looming budget gaps and talk of potential cuts. And when it does, it won’t be pretty.

Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com