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Analysis: Vacant office buildings could increase property taxes for all CRE owners

Empty office spaces have been one of the biggest consequences the commercial real estate industry suffered, from a business perspective, following the COVID-19 pandemic. Decreased rents have had a negative impact on office CRE owners, but there’s another pain point they will likely have to deal with — higher property taxes, reports.

The likely outcome is for commercial real estate to bear higher tax burdens via higher property taxes, transfer taxes, and potentially ‘green’ taxes,” wrote Danny Ismail, co-head of Green Street’s Strategic Research group. “Several cities have already made this move with more likely on the way.”

Currently, more than 60 percent of tax income to cities and counties comes from property tax, according to Pew. The remainder is a combination of sales and income tax, among others. Property taxes are a top revenue source in 40 states.

The Urban Institute also noted how critical property taxes are, reports.

“All states have property taxes (at least at the local level),” the research organization said. “New Hampshire was the most reliant on property tax revenue in 2019, as the tax accounted for 36 percent of its combined state and local general revenues.”

New Jersey (29 percent), Maine (27 percent) and Connecticut (26 percent) weren’t far behind New Hampshire when it came to reliance on property tax revenue, according to the Urban Institute. Additionally, 10 states saw at least 20 percent of their state and local general revenues come from property taxes in 2019.

A lack of property tax revenue would make it difficult for many municipalities and counties to function, reports. They rely on property taxes for a variety of everyday operations such as schools, business development, mass transit and policing. Offices have been a long-time funding source for these communities through their property taxes.

Unfortunately, these buildings’ property taxes are based on their property values. If office building vacancies don’t decrease, the value likely will, leading to a drop in that critical property tax revenue.

“Commercial property values have fallen in the last year given a rise in interest rates but work from home (WFH) is a particularly acute drag on denser urban metros,” Ismail wrote. “Barring a recovery in commercial real estate values or a shift in worker/employer attitudes towards WFH, there is a structural mismatch in how cities will fund themselves going forward. Lower assessed tax values coupled with less in-office work have and will cause damage on city budgets, local infrastructure, and overall quality of life within major cities.”

If office CRE’s property taxes can’t generate enough revenue, local governments might turn to raising taxes on other CRE and residential properties to make up the difference.

“It’s impossible to predict the form or timing of higher real estate taxes, but the direction is clear,” Ismail wrote. “Empty offices and quiet downtowns are a negative drag on fiscal health without a quick or easy fix. Investors should expect upward adjustments in commercial real estate related taxes as long as workers prefer the home kitchen table to the downtown cubicle.”

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