January 31, 2024

Reassessing Office Space in the Post-Pandemic World

State and Local Tax

Real Property Tax

3

Minutes to read

Property owners must appeal their assessment to ensure accurate values of real estate.

Although many industries have bounced back from COVID-19, the pandemic is still affecting commercial real estate. It triggered a true test of the way the world works. Could the world work from home?

In several cases, the answer was – and still is – a resounding yes.

The Remote/Hybrid Workplace Effect

The shift to a remote and hybrid workforce changed the office market, possibly forever. When leases come due, office developers are seeing a trend to smaller spaces and “hoteling” formats.

On top of the challenge of bringing workers back to the office, changes are being made to the office design, infrastructure, and amenities surrounding the traditional office building. These changes are dictating heavy capital expenditures to compete within the industry.

Office developers are forced to make these changes or risk losing tenants.

Phil Mobley at CoStar says, “Over the past four years, office occupiers have begun adjusting their space requirements to accommodate new, post-pandemic workplace occupancy patterns. So far, they have given back over 180 million square feet.”1

But that’s not all…

The US office vacancy rate has increased to 13.2% from 9.5% before the pandemic. CoStar forecasts it will increase to more than 17% by the end of 2026.2

Ninety-eight percent of people who currently work from home said they would like to continue working remotely. This is up from 65% in 2020, which suggests that people are getting more comfortable with remote work.3

The Inaccurate Assessment Result

Have assessment departments kept up with this shift to remote work and office vacancies? No.

But in their defense, it’s difficult to keep up, as even the office owners and developers are scrambling. Assessors will analyze historical data on rent, income, and expenditures, but they’re likely not seeing factors like:

  • There are heavy rent concessions on renewals and re-negotiated leases.
  • Changes in the internal footprint of the office space are made to accommodate “hoteling” and hybrid work demands.
  • The inflexible nature of older office buildings makes changes not cost-effective.
  • Owners/developers provide creative amenities to bring the workforce back to the office.
  • The increased amount of tenant buildout is necessary to attract new tenants.
  • Increased competition through subleasing of vacancies – why pay a higher market rent when you can sublease for a lot less?

Unfortunately, it’s up to taxpayers to explain the market trends to the assessors. They’ll need to show assessors the outflows mandated to keep the asset competitive within the market.

When a building is overvalued for real estate tax purposes, it’s worth less in the marketplace than one that is fairly assessed. Taxpayers need to appeal their assessment, request the assessor’s worksheets, and analyze whether there is potential for savings.

These appeals act like checks and balances on the jurisdictions’ valuations and may be necessary for the current remote workforce environment.

For assistance with your appeal, contact our real property tax experts.

1https://www.costar.com/article/725429132/here...

2https://www.wsj.com/real-estate/commercial/office...

3https://www.cloudwards.net/remote-work-statistics/

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