Office buildings with vacant space at the corner of Washington and Bromfield streets in downtown Boston in January 2024. Boston’s office market ended last year with a vacancy rate of 15.8 percent, up from 12.5 percent the previous year. Photo by James Sanna | Banker & Tradesman Staff

As thousands of property owners in Boston seek abatements and researchers forecast a steep decline in property tax collections, Mayor Michelle Wu’s options are limited in finding ways to cushion the fiscal blows without layoffs and deep cuts to services.

A study by the Boston Policy Institute projects declining commercial real estate valuations will translate into a $500 million annual decline in Boston’s municipal budget, which is currently $4.3 billion, by 2029.

During a prior economic downturn, the late Mayor Thomas Menino received legislative approval in 2003 to temporarily shift a larger share of property taxes to commercial properties, minimizing increases in the residential tax rate.

Revisiting that strategy would be a fruitless exercise in the post-COVID environment, where demand for office space appears to be permanently diminished, according to Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, which partnered with the Boston Policy Institute on the study.

“In a healthy industry when you raise taxes, the industry can reduce their profits or change prices,” Horowitz said. “In a distressed industry, higher taxes just push prices down. It’s largely self-defeating.”

Commercial properties in Boston currently already are taxed at more than double the rate of residences, under the maximum dual tax rate differential allowed under Massachusetts law.

As a result, commercial properties pay 58 percent of the tax levy despite representing only 33 percent of the taxable values, according to the Boston Municipal Research Bureau.

Alternative revenue streams such as local income and sales taxes are not legal in the Bay State, but could merit a second look on Beacon Hill, the Boston Policy Institute report concluded. Similarly, the state could provide direct aid to Boston, seeking to head off a broader hit to the regional economy.

Declining Income Points to Valuation Drops

Commercial landlords in Boston have ample fodder to bolster arguments they deserve relief on their property tax bills in the coming year.

Boston assessors received 1,715 applications for property tax abatements in time for the annual Feb. 1 deadline, a decline of 1,813 from the previous year. The volume represents 1 percent of the citywide inventory of taxable properties, according to Wu administration press secretary Ricardo Patrón.

But the city reevaluates every taxable property annually to reflect current market conditions. And commercial real estate values including the city’s 83 million-square-foot office market appear to be under pressure from historic retreats in occupancy, setting off rent declines in 2023.

Under Massachusetts law, commercial properties can be assessed using one of three methods.

The most widespread is based upon the income they generate from tenants, based upon information submitted by building owners on rental income and expenses, said Matthew Kiefer, a real estate attorney at Goulston & Storrs.

The sales approach, by contrast, draws data from pricing of recently-sold similar properties. But investment sales activity came to a standstill after COVID amid confusion over future office-based work demand. Since 2022, only 39 office properties have sold in Boston, according to data compiled by brokerage Hunneman, all but 10 of which are under 100,000 square feet.

A third method, based upon replacement cost, is suitable mainly for owner-occupied properties.

Office Owners Have Options

Appraisal experts advise landlords on the abatement process.

“You’d use the [method] that gets you to the result that your valuation expert thinks is best for valuing the building, and the one that’s most defensible,” said Daniel Ryan, a tax attorney for Sullivan & Worcester.

Unsatisfied property owners can take their cases to the state Appellate Tax Board.

“If the building owners can get a win or two, then maybe the city will capitulate. It depends a lot on what the precedent-setting cases look like, in terms of acceptable assessments for the city,” Horowitz said.

Brokerage research tracks the market-wide decline of commercial landlords’ financial positions.

Boston’s office market ended 2023 with a vacancy rate of 15.8 percent, up from 12.5 percent in the fourth quarter of 2022, according to CBRE data. Average lease rates declined from $66.60 to $63.39 per square foot on a gross basis over the same 12 months.

Boston’s expanding lab cluster took its own hits in 2023. Vacancies rose in the past year from 1.9 percent to 7.6 percent within the 15.4 million-square-foot lab market. Average rents declined just over 1 percent to $103.19 per square foot.

Brokerage Cushman & Wakefield’s valuations group in Boston hasn’t received an unusually large number of requests from landlords for evaluation or abatement advisory work, said Rob Skinner, the brokerage’s managing principal in Boston.

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“It’s definitely increased, but I wouldn’t say it’s a tidal wave,” Skinner said.

Appraisals generally lag market conditions, particularly in volatile conditions such as the past decade, Skinner said, so many properties still may be assessed at rates that remain tolerable to landlords.

“You’re still getting assessed below where it’s worth, because [the assessment] lags market value,” he said.

Administration Bets on Growth

For now, the administration is focusing on a series of downtown revitalization strategies, including office-to-residential conversions, grants for new retail tenants and the recent change of operator at Faneuil Hall Marketplace.

In an email, Patrón characterized the number of abatements submitted this year as “in line with expectations” and the city’s revenue forecasts.

“[W]hile we do not anticipate instability in our revenue streams, we are concerned about and paying close attention to the impact of office vacancy on our broader real estate market. We are closely monitoring this market and have met with downtown property owners and business leaders to explore a strategy to address the potential challenges posed if commercial values decline significantly in the near term,” he said in a statement also shared with other media outlets.

Filling the CRE Tax Gap

by Steve Adams time to read: 4 min