Faced with a sharp downturn in office property values in Boston, Mayor Wu is trying to cushion the blow of rising tax bills expected for owners of residential property.

Last week, she announced plans to file a home rule petition with the Boston City Council that would allow for the shift in the tax burden to be reduced and slowed down temporarily. If the measure were to be approved by the council and at the State House, an increase in the higher tax commercial rate, for properties losing value, would result in smaller decreases in quarterly bills, while owners of residential property would still have tax increases, though for smaller amounts.

Like other cities around the country, Boston has experienced a fall-off in demand for commercial space, mainly due to the shift to remote and hybrid work that spiked during the pandemic. The resulting decline in foot traffic in downtown business areas has also contributed to more vacancies for retail and restaurant space, a trend already driven by the shift to e-commerce and food delivery apps starting before the pandemic. For many owners of commercial property, the drop in its value coincides with expiring leases and a need to renew financing – made more difficult by higher interest rates.

Based on figures from the last quarter of 2023, the commercial real estate firm CBRE described a “challenging landscape” for owners of Boston’s vintage office space, aside from more desirable “blue chip” properties.

“With demand still well below historical levels, an elevated cost of debt and all-time high vacancy rates, rents and subsequent cash flows are under intense pressure,” CBRE observed, but also noted, “Even with these challenges Boston office vacancy rates rank amongst the lowest of major US markets. This is due to the city’s strong employment base and diverse economy resulting in more resiliency than other large markets.”

According to a February report by the Boston Policy Institute, an expected 20-30 percent decrease in the value of office space by 2029 will saddle the city with a cumulative revenue shortfall of $1.2 billion to $1.5 billion. “And” researchers warned, “with no clear prospect for recovery, such shortfalls could persist for decades, triggering a long-term decline in public services and economic vitality.”

Among Boston’s residential properties, some of the sharpest increases in value in recent years, with resulting jumps in tax bills, have been at the lower end of the housing market, including much of Dorchester and Mattapan. But officials say residential owners won’t see the expected shift in the tax burden on their bills until the beginning of 2025, after a major revaluation by the city’s Assessing Department.

Under the current law, tax rates for commercial, industrial, and personal property in Boston can be set higher, up to 175 percent of the share of total valuation. For residential property, the rate would have to be no lower than 50 percent of the total share. Without legislation to change the limits on rates, and without new revenue or budget cuts, a drop in value for commercial property would require a shift of the tax burden to the residential class. Under the home rule petition, the levy on commercial property would have a ceiling rate of 200 percent, then declining over a period of three years.

At a briefing on March 28, Wu described the home rule petition as needed because the shift in values “could significantly increase” the property tax on homes and apartment buildings, which would also affect affordability. “What we are trying to avoid here,” she said, “is a more sudden, dramatic and concentrated shock to residential property owners, which would hurt residents and businesses alike.”

Among those expressing support for the home rule petition during the virtual briefing was Symone Crawford, the executive director of the Dorchester-based Mass. Affordable Housing Alliance (MAHA). The grassroots organization tries to expand access to affordable housing, with more than 2,500 buyers and homeowners graduating from its classes every year.

“We know firsthand that homebuyers and homeowners are struggling with rising costs,” said Crawford. “We have home prices that are just phenomenal right now. We have interest rates, insurance premiums are through the roof, and just general housing costs. So, this makes it especially important that we act quickly to stabilize the real estate taxes for our families.”

Expressing support for the measure as “a senior citizen on a fixed income” was Shirley Jones, the president of the Meetinghouse Hill Civic Association. “This increase in this property tax will be extremely devastating,” she said during the briefing, “and I’m so very grateful that the mayor is being proactive and taking actions to protect residents like myself throughout the city from these potential increases.”

Veronica Barros, who owns a three-decker in the Bowdoin-Geneva neighborhood with her father, told The Reporter that her tax bills have already been rising, with the property assessed at $1.2 million. She said they’ve owned the property for decades and currently rent one floor below market level to an immigrant family.

“We’ve gotten a surprise with taxes already this year,” she said. “When I got that bill, I froze. I got this feeling in the pit of my stomach. You sit down and have to take a breath. It’s hard to swallow and infuriating.”

Even with a tax exemption for owner-occupancy, she says she struggles to pay bills and keep up with needed repairs.
“You look at these properties and people think it’s a cash cow,” she said. “The reality is people are struggling to stay and live in Boston and keep their houses up and deal with higher prices everywhere. A lot of these houses are people struggling with families. Many people try to split the taxes among family, but it’s a big, big bill for one person to pay even if there is rent coming.”

Barros added, “We came from Cape Verde and everyone owns their own house here. They bought their houses at a good time. Today, it’s hard for us to all get by.”

District 4 (Dorchester/Mattapan) City Councillor Brian Worrell mentioned one homeowner at a senior center in Grove Hall who told him her tax bill had gone up by $700. He says many longtime owners have faced similar increases, with even steeper climbs in the future without the kind of relief sought by the mayor.

“And if this is not adopted, I believe it could get somewhat out of control,” he said, “so I think this is a very thoughtful measure, easing us into those tax increases that are going to come just because we live in a city that people love. People want to buy here, which helps, which is increasing the market value on our home, which is then reflected in our tax bills.”

In its study, the Economic Policy Institute maintained that increasing the tax burden on residential property would be “a more promising path,” but its researchers also cautioned that could require a tax increase from 25 to 30 percent. “For individual homeowners and multi-family properties,” they wrote, “an increase of that size would mean higher tax bills and also reduced home values, as potential buyers reckon with the increased cost of ownership.”

In 2004, after an earlier slump in commercial property values, former mayor Thomas M. Menino also tried to spare residential owners the full brunt of the shift in the tax burden. As a result of the measure approved at the State House, an expected 40 percent tax increase for the average single-family home was limited during the first year to 14 percent. Without the measure, the tax increase for three-family homes would have been 56.5 percent. Wu said her proposal was modeled on the same legislation.

In 2004, the measure that brought relief for homeowners stirred complaints from small business and property owners: a tax adjustment that could be absorbed by owners of high-end commercial property could have a different effect in neighborhood business centers.

The tax adjustment in 2004 came after a national economic downturn with increases in office vacancies, while residential values were at least holding steady. Helping to make the downturn shorter and less painful were low inflation and the lowest interest rates in 40 years. Commercial property owners are currently faced with different conditions and what Greg Vasil, the CEO of the Greater Boston Real Estate Board, described as an “an unsettling downward transition” in a world changed by the pandemic.

“We are deeply concerned that increasing commercial tax rates to recoup lost revenue will only take us closer to the urban doom loop being seen in many other American cities,” Vasil said in a statement issued March 28. “Businesses have carried a tremendous fiscal burden for the city and pushing them harder at a time when their buildings have lost value is fiscally irresponsible. This is a time unlike any other in the last 30 years and piling more financial burdens on a struggling industry is no solution at all.”

Another way to ease the tax burden would be to reduce overall revenue to less than the ceiling allowed under Proposition Two-and-a-half. Since the measure was approved in 1980, the city has never collected less than the maximum amount. And Wu said it was “just not realistic” to solve the budget problem through cuts in spending. “We would not be able to deliver city services at a basic level that we know our constituents and residents deserve,” she said.

Though city officials emphasized that the tax rate adjustment would be revenue-neutral and temporary, the Boston Policy Institute warned, “This is not a short-term challenge but the arrival of a new normal, where annual tax collections in 2029 and beyond will be roughly $500 million below the current trend.” And the Institute noted that Boston’s revenue stream, unlike those of many other cities faced with similar downturns, is “unusual” for its “outsize dependence on commercial property,” as opposed to other sources of revenue – sources that can also be less stable than the property tax.

The limits of the revenue stream were also cited by Wu during the briefing. “So, there is a bigger picture question about the city’s reliance on property taxes,” she acknowledged. “It is unusual for a city to have nearly three-quarters of its tax revenues come from property owners, and in this case, mostly commercial property owners, for Boston in order to continue to support affordability.”

Worrell said it would “take more than one piece of legislation” to determine the best revenue mix from future development and even new growth areas such as the app-driven gig economy.

“We do need to find other revenue sources, that we’re not always going back to the same well and drawing from it,” he said. “But I just also want to acknowledge the fact it was our property tax revenue that kept us stronger than most cities during economic downturn.”

Reporter News Editor Seth Daniel contributed to this article.