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Atlanta, Boston budgets most sensitive to office-market stress

A recent analysis released by Moody’s Investors Service shows that Boston's city budget is sensitive to the impact of the commercial real estate market.Craig F. Walker/Globe Staff

Remote work and rising interest rates have battered office values, a potential worry for city officials and the investors who count on property-tax revenue to help repay some of the municipal debt they buy.

But a Moody’s Investors Service analysis shows the impact of the upheaval in the commercial real estate market will vary from city to city depending on two key variables: the percentage of cities’ tax dollars derived from property taxes and the share of the tax base made up by commercial property.

By these metrics, Atlanta and Boston’s budgets are most sensitive to a decline in office, retail, and hotel values among the 14 cities analyzed, while Phoenix and Philadelphia are best positioned. In Atlanta, commercial property makes up 48 percent of assessed value and property taxes comprise almost 40 percent of city revenue. By contrast, in Phoenix, commercial property accounts for about a quarter of assessed value, but real estate taxes make up just 9 percent of city revenue.

“There’s significant variation in the potential credit impacts of the commercial property downturn,” Moody’s said in the October report. “Some cities with high concentrations of commercial property aren’t heavily reliant on property taxes for revenue, leaving them more insulated from swings in commercial real estate assessed value.”


The pandemic accelerated a move to remote work and a migration of college-educated workers away from expensive coastal cities to more affordable cities in the South and Southwest. Not only has the shift to working from home pushed office vacancies to a record high, but stores and restaurants that count on workers for business have suffered and driven rents down.

Compounding the stress, rising interest rates and tighter lending standards have made it harder for building owners to refinance.

Office values could drop 35 percent from their peak by the end of 2025 and take an additional 15 years or more to recover, according to a forecast by Capital Economics earlier this year.


City budgets, however, rely on more than property-tax revenue. Levies on sales, incomes, corporations, fees such as water and sewer, and federal and state aid make up the rest. Property taxes make up a median 27 percent share of revenue in Moody’s sample and the median assessed value from commercial property is 29 percent.

Still, a decline in property values can leave a hole in city budgets that they’ll have to fill by making politically difficult decisions to cut services or raise revenue.

While it’s never popular to raise property taxes, some cities have more flexibility, Moody’s said.

In Chicago, the city government determines how much money it wants to raise from property taxes overall and then the Cook County clerk adjusts the rates to generate it. Chicago’s city council doesn’t need to vote on the adjustment.

“The tax base value can go down, but the tax levy is separated from that,” said Nicholas Lehman, a Moody’s vice president. “They could continue to increase their property-tax levy and the tax rate is automatically adjusted to offset valuation fluctuations.”

By contrast, some states cap a local government’s ability to increase the property-tax levy or tax rate applied to a property’s assessed value.

Meanwhile, cities like San Francisco and New York — home to big office markets and remote-friendly industries like tech, media, and finance — are cushioned from property-market downturns by assessment practices that incorporate a lag or that phase in commercial property price declines.


A 2022 report from the San Francisco controller’s office regarding the impact of remote work on property-tax revenue under three scenarios estimated losses ranging from $80 million to $200 million annually, or 3 percent to 8 percent of the $2.5 billion raised from property taxes.

In New York City, commercial properties aren’t valued based on recent sales, but on lagging income and expense information that building owners submit about their properties. In addition, the city phases in changes in assessed value over five years.

A “worst-case” analysis by city Comptroller Brad Lander found that a decline of about 40 percent in the market value of office properties over six years would result in $1.1 billion less tax revenue for fiscal 2027. That represents just 3 percent of projected property-tax revenue.