A topic that doesn’t come up often enough when discussing the future of the office is property taxes. Because the money that comes into local and county governments is significant.
By: Erik Sherman, Globest, March 29
A topic that doesn’t come up often enough when discussing the future of office is property taxes. Because the money that comes into local and county governments is significant. But what will happen when office buildings’ valuations decline because of the shifting patterns of demand?
As Danny Ismail, co-head of Green Street’s Strategic Research group, recently wrote, “The likely outcome is for commercial real estate to bear higher tax burdens via higher property taxes, transfer taxes, and potentially ‘green’ taxes. Several cities have already made this move with more likely on the way.”
Pew put together some interesting numbers on the general topic: 61% of tax income to cities and counties comes from property tax. The rest is a mix of sales tax, income tax, and some other types. In 40 states, property taxes lead revenue sources.
Municipalities and counties are largely dependent on property taxes to pay for what they must do every day. Policing, street maintenance, schools, business development, mass transit—everything. Office buildings have long been important as a funding source through property taxes, which are based on property values. And everyone in the industry knows where those have been going.
“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,” Green Street’s 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.”
To maintain the revenue, local and county governments will look to other sources for income. A likely seeming one would be increasing tax rates on other properties, both CRE and residential.
