That could have a big impact on Boston’s budget in the years to come.
The city taxes commercial properties like office towers at a much higher rate than residential property — $24.68 per $1,000 of assessed value, compared to $10.74 per $1,000. Amid a broad real estate boom in the past two decades, the share of the city’s revenue that comes from property taxes has grown by 20 percentage points: from 52.4 percent in fiscal year 2002 to 72.4 percent in fiscal 2024. That revenue is a big part of how the city pays for basic services such as trash collection and snow plowing.
Each January, property owners get an assessed value of their buildings. If owners disagree with their property’s assessed value, and think their tax bills are too high, they have a month to file what’s called an abatement — an appeal for a lower property tax — with the city. The deadline for that appeal is Feb. 1.
Boston Press Secretary Ricardo Patrón said Boston officials won’t know for a few weeks how many property owners are appealing their tax bills: the abatement requests have to be postmarked by Feb. 1, so it will take a bit for all the applications to roll in.
In many cities, such as New York, it’s standard practice to file an abatement request. Boston had 1,799 abatement requests in its last fiscal year, down from 2,040 in fiscal 2022 and 2,585 the year prior. But with commercial property values on the decline thanks to ongoing vacancy increases and less demand for lower-quality space, industry experts expect to see more abatement requests this year.
Boston isn’t unique in this: almost every big city is re-gauging valuation of its commercial property, said George W. McCarthy, president and CEO of the Lincoln Institute of Land Policy in Cambridge. However, he said, Boston and other cities and towns in New England tend to rely more heavily on the property tax than other areas in the US. (New Hampshire, for instance, famously does not have an income or sales tax.) Massachusetts also limits how much property taxes can be increased year-over-year, under a 1980 law called Proposition 2 ½.
The city has a number of arrows in its quiver to compensate for any revenue losses, such as changing tax rates, McCarthy said. What’s more, residential property values are continuing to rise, which can help make up for any commercial revenue loss.
“It won’t be a revenue apocalypse if they’re able to adjust the rates to compensate for the loss in property value on the commercial side,” McCarthy said. “It really depends on how prolific the requests are for abatement.”
Of course, some buildings have held their value better than others. Newly built towers will add to the city’s tax rolls; fully occupied properties generating lease income will likely not see their cash flow drop the way a half-empty, less-desirable office will. But by and large, office values are dropping across the city and region. The average market price per square foot of office space in the Boston metro area was $407 in 2023, down 13 percent from a peak of $468 in 2021, according to CoStar data. The real estate analytics firm is predicting another 17 percent decline in valuation by the end of 2025.
Many office buildings across the city are more than half empty, and vacancies are at record highs, said Jeff Myers, research director at brokerage Colliers in Boston. The vacancy rate for so-called Class B office space is 28 percent, and will probably grow in the near term, Myers said.
It takes years for the commercial real estate market to catch up with what’s being seen on the ground: even offices that look empty may have leases that extend for another few years, or loans that are still in good standing. But as the implications of the COVID-19 pandemic continue to ripple through the office market, they’re gradually translating into higher vacancy rates, lower rents and, ultimately, an argument by property owners to the tax man that their buildings are simply worth less than they used to be.
“I don’t think there’s going to be a tidal wave of tax appeals submitted to the city,” said Chris Froeb, partner and real estate practice lead at law firm Nixon Peabody in Boston. “But I think the number of appeals that are submitted this month will increase next year, and it’ll be more than the year before.”
Boston for years has been on solid financial footing; the city last year maintained its AAA bond rating from Moody’s and other financial firms. The expected decline in office valuations is not at crisis levels, but could prove to be stress on the financial system, said Ron Rakow, a fellow at the Lincoln Institute and the former Commissioner of the Boston Assessing Department.
“This is not just a Boston thing,” Rakow said. “This is happening in real estate markets across the country.”
The real estate downturn will also create some opportunity. In the aftermath of the last big real estate downturn 15 years ago, Boston Properties — which is now going by its stock ticker symbol BXP — snapped up two premier Boston towers at a discount: the former John Hancock tower at 200 Clarendon St. in Back Bay and 100 Federal St. in downtown’s Financial District.
This week, BXP CEO Thomas told analysts that the company is looking for other opportunities to acquire high-profile office buildings, even if they’re not fully leased.
“There are more distressed players that are out there, buying assets at very low per square foot prices. … Those aren’t the kind of deals that we want to do,” Thomas said. “We’re looking for premier workplaces. … There’s much less competition for anything like that.”
Catherine Carlock can be reached at [email protected]. Follow her @bycathcarlock.
