Besieged by rising office vacancy rates, depressed leasing activity and weak sales, a group of office building owners has commissioned a report showing a pending drop in property tax collections. The owners are requesting county assistance and predicting budget headaches if they don’t get it.
Here are the problems as they see it. MoCo’s office vacancy rate has risen from 13.1% to 17.7% since 2019, partly because of changing work patterns since the pandemic. Net absorption – the difference between newly leased space and newly vacated space – has been negative in four of the last five years. Annual gross rent growth has been below 2.5% for at least 15 years. Office capital return rates in MoCo have been negative since 2011. In 2023, office transaction volume and price per square foot were at their lowest levels since at least 2005. So the picture here is of preexisting weakness that was exacerbated by the pandemic.
To illustrate the consequences of the above, the office building owners hired real estate consultant RCLCO to evaluate the impact of office market weakness on property tax receipts. RCLCO found that while property valuations and property tax collections had risen steadily since 2019, the office sector was one of the weakest performers. Furthermore – at least so far – occupied office space had fallen faster than office value assessments in the county’s ten most valuable multi-tenant office buildings, meaning that further valuation declines could be built in. The company calculated three scenarios under which office property tax collections could decline by $16-47 million annually within a decade.
Distress in the county office market is not a hypothetical thing – it’s real. Back in April, Brookfield Corporation – a mammoth office building conglomerate based in Toronto – defaulted on a loan for a dozen office buildings, with nine of them in the D.C. area and seven of them in Montgomery County. One of them was One Metro Square, 51 Monroe Street in Rockville, an office building recognizable to most county residents. Defaults such as these will surely impact assessments and tax receipts.
Click here to read the rest of the article written by Adam Pagnucco over at Montgomery Perspective
