Making the case for property tax reductions in office space in 2022 - by David Wilkes

Among the various types of properties that are the subject of tax certiorari proceedings, office buildings today present some of the greatest challenges. For hotels, the impact of COVID was one of the most immediately recognizable: As the pandemic quickly spread, vacations were immediately terminated and all but the most urgent non-leisure travel occurred; and the hotels that were not fully shuttered were often used as temporary housing and care facilities. In the retail sector, where bricks and mortar was already an endangered species by 2019, many shopping malls simply went dark; vacant stores were obvious to the observer. And at the other end of the spectrum, industrial, distribution and warehouse space largely skyrocketed to values that eviscerated the merits of many tax appeals, so not much to talk about there except in unusual circumstances.

That left office space, somewhere perhaps in the middle. While everyone is familiar with the apparent devastation to the very concept of working in an office, the floor plate reality has not yet aligned with office pro formas to support what we all intuitively know has occurred.

In other words, in contrast to hotels and retail, the fallout is occurring far more gradually, often almost invisibly, so that for many properties it’s just too early to say with great clarity how bad things really are. Office leases are often five years or more, and most credit tenants will keep paying the rent even if hardly anyone is occupying the space. Tenants of office space differ widely in how they are using space, but the overwhelming majority have substantially decreased their utilization.

The real question is, how will investors view that space when those leases are up for renewal? And what about the added costs to maintain office space that are associated with COVID and its progeny?

The result is that many assessors today have not seen fit to give office owners the tax break they deserve. Though it may be more difficult to prove a case for a property tax reduction for office space than for a hammered hotel in which the damage is obvious, the evidence is out there and building to show that property tax assessments remain excessive. Office vacancy rates in New York City are now at a 30-year high of over 18%, according to a recent report from New York State comptroller Thomas DiNapoli. By January, only 13% of Manhattan office workers are expected to be in the workplace five days per week, according to a recent survey. A third will be in three days per week, and some 21% will remain fully remote.

Average expected daily office attendance among financial services firms will be 47%, accounting firm will be 36%, and consulting firms 30%. According to the Partnership for New York City, in addition to these vacancies, high-earning business owners and financial partners are leaving New York and taking their workforces with them. The Partnership projected that 22% of financial firms plan to reduce their New York City-based workforce in the next five years. This is of course consistent with allowing many lease terms to run their course. “Post-pandemic, remote work is here to stay,” said Kathryn Wylde, president and CEO of the Partnership for New York City, the city’s leading business group. “There is going to be a permanent relook at keeping offices and jobs in New York City.”

Heading into 2022, and with New York City’s upcoming assessment roll around the corner, followed by rolls throughout New York’s suburbs, assessors must ask themselves, what possible justification exists to assume that rents will not take a nosedive while expenses remain constant or surge? More important, given the present uncertainty and the above statistics, who wouldn’t expect a massive discount when pricing office space?

David Wilkes, CRE, FRICS, is a partner in the tax certiorari law firm of Herman Katz Cangemi Wilkes & Clyne, LLP, with offices in Manhattan, Westchester, and Long Island