Projecting Risks to City’s Finances as Office Market Recovery Lags

“While New York City’s economy has largely rebounded from the pandemic, the commercial real estate sector — in particular the office market, has not” according to the recently released report by the New York City Comptroller’s Office. Office buildings’ share of total New York City property tax levy is 21% in Fiscal Year 2024 (FY 2024); however, a continued decrease in demand for office space would put downward pressure on office rents and in result a long-lasting drop in office property valuations by the New York City Department of Finance (DOF). Focusing on the potential impact on property tax revenues and the risks the office market poses for the city’s finances, the report offers four scenarios as we look ahead. The first scenario reflects the baseline projection used in the Comptroller Office’s Executive Budget Report forecast and assumes that “DOF market values for Manhattan offices will grow by 3.2% in FY 2025, 2.7% in FY 2026 and 0.5% in FY 2027.” In the “optimistic” scenario, it is assumed that DOF market values will increase by 2.6%, 3.6% and 4.5% during the same fiscal year periods based on the forecast that “office rents would not only stop declining but revert to rates of growth in line with trends from 1998-2020, while vacancy rates would level off.” In contrast, the “doomsday” scenario assumes that market valuations “will decrease by 6% annually in FY 2025 to FY 2027 from the final FY 2024 market values, resulting in an estimated revenue shortfall of about 1.4% of city tax revenues; and although not a small amount, it is well within the range in which tax revenues can ordinarily vary.”