With Downtowns Half-Empty, Will CRE Taxes Rise?

How underpopulated downtown office buildings may lead to increased tenant spending

In general, vacant offices across the nation have been perceived as a problem solely for landlords. With a lack of tenants filling the floors of skyscrapers, it’s no wonder that many landlords are unable to pay mortgages and more buildings are getting sent back to lenders. Over the past few months in Minneapolis alone, several properties have been returned to banks, including Fifth Street Towers and LaSalle Plaza.

A more undiscussed issue, however, may be how the decline of the American office may result in financial impacts in unexpected places. Here, we are bracing for the possibility that commercial real estate tenants could lie victim to increased property taxes due to falling demand and, thus, falling property values of the nation’s office buildings.

How cities, like Minneapolis or St. Paul, generate revenue

City governments derive their income from a variety of sources. Grants, tourism, fees, fines, and public-private partnerships all are responsible for providing cities with the cash to fund essential services. Without these sources, street maintenance, public transportation, policing, and fire protection would not be possible. The largest contributing income stream for city revenue, however, comes from taxes. This includes sales tax, income tax, and property tax. According to the U.S. Census Bureau's 2017 Annual Survey of State and Local Government Finances, property taxes account for 72% of all local tax revenue in the US.

In short, cities get most of their funding from property taxes.

How property taxes are determined and why building values change

City governments are also responsible for determining how much each property is taxed. Generally, this is based on the value of the property – both the land and the buildings and other structures (the “improvements”). This assessed value is liable to change based on several factors: market conditions, physical deterioration, changing building codes or zoning regulations, or renovations/improvements being made. While some of these may cause property values and taxes to increase, many of these factors would cause property values and taxes to drop.

In our current climate, market conditions have been less than rosy, with a lack of demand sending buildings back to the bank or to auction to sell at a lower price. When property values drop, the city receives less property tax income from these buildings, and if cities are losing revenue due to inclement market conditions, government leaders will look elsewhere to recoup these costs. There is a strong likelihood that increasing tax rates on commercial real estate properties would be a logical step to financial recovery for the city.

What this means for an office tenant

If the cities of Minneapolis or St. Paul have to raise property taxes, it won’t necessarily just be landlords affected. Increased property taxes would trickle down to the common office tenant, which could wreak havoc on a business owner’s bottom line. Unfortunately, there is no way to predict the future. It’s unclear when rates could rise; however, the chances of tax rates increasing will continue to strengthen as long as the work from home business model continues to prevail over the days of working solely from the office.

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Have questions about this article? Reach out to Rokos today! We are here for you and happy to help.

Rokos Advisors is an award-winning Minneapolis – St. Paul-based commercial real estate/tenant representation firm specializing in

helping businesses find the perfect office or industrial space for their company.