Boston’s commercial property market is experiencing a significant downturn, which may have serious repercussions for the city’s budget, where property taxes account for approximately 71.1 percent of its $4.8 billion budget for 2026, translating to about $3.47 billion.
A recent report from the Boston Policy Institute (BPI) highlights that the decline in commercial real estate values, while a national issue, poses a particularly severe challenge for Boston.
The report indicates that commercial properties represent the city’s largest revenue source for core services, contributing more than homeowners and other levels of government.
In response to these findings, Boston Mayor Michelle Wu has pushed back, labeling the BPI’s conclusions as “false information.”
The Wu administration maintains that decreases in office values will not negatively impact city revenue but will instead necessitate higher residential taxes to compensate for any declines in commercial property taxes.
At a recent press briefing, Wu reaffirmed the city’s commitment to a balanced budget, emphasizing ongoing monitoring of property values.
“We are going to continue to celebrate and highlight the progress that we have made, while continuing to double down on believing in Boston and working alongside those who are making decisions to invest in our downtown neighborhoods and in our city,” she stated.
Meanwhile, Josh Kraft, Wu’s opponent in the upcoming mayoral election, has expressed concerns about the fiscal impact of falling commercial real estate values and called for a serious evaluation of pro-growth policies and potential budget savings.
Kraft’s statements reflect a growing concern about future budget challenges linked to declining commercial property values, as he acknowledges their negative implications for Boston’s fiscal landscape.
The BPI, which started operating in late 2023, has sparked significant debate regarding property tax rates on commercial properties.
Last year, Mayor Wu proposed a plan to increase taxes on commercial properties beyond the standard 2.5 percent annual cap, aiming to balance the budget without imposing heavier burdens on residential taxpayers.
This proposal, however, faced opposition in the state legislature and was ultimately not passed, but Wu has introduced it again this year.
Despite recent fiscal praise for Boston, including AAA bond ratings from Moody’s and S&P Global, concerns about the city’s economic resilience persist.
Moody’s has indicated that a significant and prolonged decline in assessed values of commercial properties could jeopardize the city’s credit rating, leading to increased borrowing costs.
In its analysis, Moody’s reported an overall decrease of 2.9 percent in commercial property values across the last fiscal year.
Conversely, the BPI provided a more alarming figure, noting that the assessed value of Boston’s office buildings dropped by 9 percent from the prior year.
Such a decline was compared to historical downturns including the financial crisis and the dot-com burst, underscoring the severity of the current situation.
BPI’s report also examined 23 sales of office buildings within the city, revealing average sale price declines of 30 to 50 percent compared to their assessed values for 2024.
Evan Horowitz, the executive director of BPI, shared these findings with the intent to illustrate the challenges facing Boston’s office sector, which has suffered significantly due to the pandemic.
Market experts have noted a change in demand, with 250 tenants currently seeking 5.4 million square feet of office space, an increase from 211 tenants looking for 6 million square feet in January 2020.
Matt Malatesta from Newmark pointed out that while the office sector has been heavily impacted, there are signs of a gradual return to demand as employers begin requiring employees to work from the office again.
Still, maturing debt, particularly buildings with impending mortgage maturities, remains a critical challenge in the current market landscape.
Although not every office sale in Boston signifies financial distress, experts have noted a rise in distressed sales, indicating troubling trends for property owners.
Rob Borden, a vice chair at Cushman & Wakefield, noted the city’s slightly delayed recovery compared to major markets like New York and San Francisco but highlighted an uptick in transaction activity.
As the debate over commercial property value declines continues, the implications for Boston’s budget and overall fiscal health remain a focal point for both the current administration and mayoral candidates.
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