Plunging Office Values Costing DC $464M in Tax Revenue

In December, a group of top office building owners and operators in Washington DC sent a letter to DC’s new chief financial officer warning that collapsing property values are a threat to the fiscal health of the city.

This week, DC CFO Glen Lee underlined this threat with an estimate of the damage to the city’s tax base from cratering office values: Lee is projecting an overall reduction in real estate property tax revenues totaling $464M over the next three fiscal years.

DC’s fiscal chief cited the proliferation of remote work in Washington as the primary culprit for DC’s sagging office market, which is lagging in its recovery as businesses follow the example set by the city’s largest office tenant—the federal government, which continues to allow thousands of federal workers in DC to “telework.”

“The expansion of remote work, coupled with higher interest rates, pose a serious long-term risk to the District’s economy and its tax base,” Lee said, in a letter to Mayor Muriel Bowser.

“Tax revenue from commercial properties in the District, particularly large office buildings valued over $50 million, significantly declined in the past fiscal year and was the main reason for the reduction in overall real property tax revenue in FY 2022,” Lee said.

Lee has reduced his projections for DC’s property tax revenues in FY 2024 by $53M, and by $105M for each of the three following years. The lion’s share of the reductions can be attributed to office properties, the CFO said, noting that he expects tax revenues for residential properties to increase by 3% for the same period, while hotel, retail and restaurant properties continue to recover.

“This growth is expected to be more than offset by a deeper loss in tax revenue from office properties,” Lee said, in the letter.

Lee also indicated that tax revenues from real estate transactions “are drastically lower than last year.” Deed taxes in DC for this fiscal year, which began Oct. 1, are down 48%, Lee said.

A bevy of big-ticket office transactions in H1 2022 that helped boost tax revenues—sales of several “trophy” properties for more than $50M each—tailed off before the new fiscal year began.

Mayor Muriel Bowser responded to Lee’s letter with a statement that called the CFO’s forecast “sobering,” saying the city will not be able to make up for the shortfall by raising taxes.

“With the ongoing impacts of telework and [uncertain federal policies], we face another significant test to our local economy. Given these challenges, it would be fiscally irresponsible to try to tax our way to sustainable, long-term growth,” Bowser said.

Bowser explicitly criticized the federal government in her inaugural speech in January as she began her third term as mayor, declaring that the widespread use of teleworking by federal employees had vacated downtown office buildings and was damaging DC’s economy.

The mayor called on the White House to choose between ordering remote federal workers to return to offices or vacating office property so it can be converted to residential use. DC has a very large stock of aging office buildings that increasingly are considered obsolete, making them targets for adaptive reuse conversions.

The DC office market added another 182K SF of negative absorption in the fourth quarter, bringing the total in 2022 to minus 1.2M SF. Washington ended the year with a 20.5% vacancy rate, CBRE said, in its Q4 office market report.

“Further vacancy increases were curtailed [in Q4] due to an office-to-residential conversion, exemplifying the impact those projects can have on limiting supply,” CBRE said.

In December, FederalCity Council, a civic organization headed by former DC Mayor Anthony Williams, in a letter to Lee signed by more than a dozen of the city’s office landlords, called the deterioration of the DC office market “a very troubling situation” that likely will severely impact the fiscal health of the city.

The letter said city officials, who included a tax increase on commercial property in their last budget, are underestimating the number of distressed office properties in DC. The CRE firms asked to be part of a process reviewing how the city calculates its assessments of office buildings.

“Our interest in this matter is not about being overtaxed. We are primarily concerned about the future fiscal health of the city. For every decline of $100 million in commercial property tax assessments, annual property tax revenue falls by $2 million,” said the letter, which was cc’d to Mayor Bowser and the City Council.

The letter was signed by a bevy of CRE firms with significant DC office assets, including JBG SMITH, Boston Properties, Trammell Crow, Hines, Brookfield, Carr Properties, and Hoffman & Associates.