The pandemic has hit New York City’s retail, office and hospitality sectors, a blow that could mean a steep drop in property taxes collected next year.
The provisional tax assessment for 2022 shows that the appraised values of these commercial properties have fallen 9.6% year over year, according to a Barclays report. And it showed that the total market value of these properties has fallen even more dramatically, by almost 16%, according to The Empire State of Real Estate report. Hotels fell the most, followed by shops and then offices.
The report’s authors were “not overly concerned about New York City‘s prospects, but a sustained downturn in commercial and multi-unit residential real estate could put pressure on its economy for years to come,” said they wrote.
While the housing market has improved steadily since February, the rental market is still suffering. In June, Manhattan’s apartment vacancy rate was 6.7%, up from 3.67% last year, according to Douglas Elliman. The number fell 7.6% in May, signaling improvement. Still, the impact of Covid on vacant homes and the slow return of the office market could lower property values and lower collections over the next several years, the report notes.
Property taxes represent 31% of the city’s annual revenue, and commercial and multi-family properties are the biggest contributors to this bracket. And it is now they who are experiencing the most uncertainties, in particular multi-family buildings and office buildings. This could lead to lasting drops in their estimated value, he noted.
The city determines the assessed value of the property through net operating income, which declines when occupancy levels decline.
Only 62% of employees are expected to return to their offices by September, and it’s unclear how much space will require longer-term hybrid work models. Vacancies are expected to peak at more than 14% in 2023, according to data from CoStar cited in the report.
Newer buildings and those redesigned for a post-Covid world will likely be more in demand, but older Class B buildings are the biggest contributors to the tax roll. Occupancy levels at those properties could drop as much as 20%, pushing net operating income down to 26%, according to the report.
Overall, vacancy rates for multi-family dwellings are 10 to 15 percent higher than pre-pandemic levels, which could mean a drop in market value of around 13 to 18 percent, according to the government. report. Barclays used the apartment complexes of Stuyvesant Town and Peter Cooper Village as an example. Combined, the massive developments saw free cash flow drop 33% last year and occupancy drop 15 percentage points to 79% during that time.
The encouraging news is that vacancy rates in all types of properties are dropping or nearing their highs, according to the report. Rent levels for multi-family properties are also close to what they were before the pandemic. At the same time, some office buildings benefiting from tax breaks are expected to exhaust the benefit over the next few years, possibly increasing the tax roll. One example: The Durst Organization’s One Bryant Park Payments in Lieu of Taxes program expires in 2029.
And although never a popular choice, the city could still raise taxes, the report notes. While small homeowners have pushed back tax rate hikes, the city’s commercial and residential property tax rates are well below average, he said.