NEW YORK CITY-Delivering a mix of good and bad news for the commercial real estate market, the city has issued a report on its fiscal year as well as a future forecast. The New York City Independent Budget Office Fiscal Outlook report projects a spike in real property tax for this year and an escalation every year through 2016.
However, the recent trend of commercial properties’ market value running higher than that of residential real estate is expected to reverse, with apartments outpacing office buildings and institutions over the next few years, George Sweeting, IBO’s deputy director, tells GlobeSt.com.
The IBO report calls for real property tax revenues to total $18.5 billion in fiscal year 2013, up by 3% over 2012, and they will reach $19.1 billion in 2014. Growth is expected to accelerate, albeit slowly, in the last two years of the forecast, averaging 4.4% during 2015 and 2016, with revenues expected to total $20.8 billion in that last year. City officials aren’t wearing rose-colored glasses, Sweeting notes, they simply are seeing signs of the beginning of the end of the Great Recession—assuming, of course, that the country is not sent over the fiscal cliff.
“We’re talking about reasonable growth,” Sweeting says. “If you look back at 2006 or 2007, or even FY2008, the city had much stronger growth. Part of it is our economic forecast for the city. In 2012, about 70,000 jobs will have been added when the numbers are done. That number slows down to 50,000 next year but then it’ll reach 70,000-plus in the remaining years of the forecast, so those gains are driving part of it.”
The city is similarly bullish and bearish simultaneously when it comes to market value growth.
According to the report, market value growth for apartment properties (Tax Class 2) and commercial properties (Tax Class 4) has been stronger than for Tax Class 1 (single-family homes) since 2008, averaging?2.1% annually for apartment buildings and 5.4% annually for commercial buildings. IBO expects this pattern of faster growth to continue, with aggregate market value in Tax Class 2 growing by 4.8% in 2014; which is nearly matched by a 4.2% gain for commercial properties. During 2015 and 2016, the pace of market value increases in Tax Classes 2 and 4 will gradually accelerate, averaging 5% annually and 4.6% annually, respectively.
Yet, city money watchers expect apartments to gain the upper hand over commercial properties on the market value growth front, notes Sweeting.
“In the last few years, commercial property that’s Tax Class 4 has been running ahead of apartment buildings but we see that switching,” he says. While job growth is anticipated, one important sector is noticeably absent from the improvement trend.
“Even though there’s job creation, there isn’t a lot in the finance sector,” observes Sweeting. “Much of it is in healthcare, education, business services and information; those are industries that can use older buildings and they don’t command the same rents as the financial sector did when it was adding a lot of jobs. So that slows our estimates of market value.”
He continues, “The finance sector is always a key variable in terms of the city’s economy and taxes, but a lot of the growth in commercial real estate hasn’t been class A space, it’s been Class 4, which is retail and institutional properties, and commercial development outside of Manhattan.”
Even the types of apartments that will thrive will vary, according to Sweeting.
“Certainly the demand for very high-end condos has been strong, and we’re expecting that to continue,” he says. “Class 1 isn’t expected to see the same growth. Rentals also are showing some growth, but there’s not much growth in co-ops.”
An accounting peculiarity of NYC is at least part of the reason for the difference in forecasts for revenue compared to market value, says Sweeting. “When you look at the projection of revenue, both for apartments and commercial buildings, the increases in market value are phased in over five years, so there’s always a lag in market values against what’s happening with the assessed value,” he notes.
“There’s a pipeline of assessed changes waiting to be factored in,” Sweeting continues, “so there’s always a lag between revenue and market values. It’s built into the law in terms of how the tax is administered.”