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Nirit Cohen – WorkFutures
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Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
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The rise of remote and hybrid work models is forcing the city of Boston to confront a daunting financial challenge. According to a report published by WBUR, the city has a projected tax revenue shortfall of more than $1 billion over the next five years due to underutilized office spaces.
The Boston Policy Institute, in partnership with the Center for State Policy Analysis at Tufts University, released a report last week detailing the economic impact of the city’s empty offices — which could also lead to an ongoing deficit of approximately $500 million annually after the initial period.
According to the report, “With the value of office space expected to decline 20–30 percent by 2029, and overall commercial real estate prices by 12–18 percent, we estimate that Boston will face a cumulative revenue shortfall of $1.2 billion to $1.5 billion over the next five years.”
The movement away from traditional office work environments to flexible ones is the biggest factor cited for the devalued commercial real estate in the city. The rise of remote and hybrid work, in combination with high interest rates, is significantly affecting Boston’s tax base.
The city heavily relies on commercial property taxes for more than one-third of its revenue. This reliance is reported to be higher than that of other major U.S. cities, making Boston particularly vulnerable to the downturn in the commercial real estate sector.
The report emphasizes the need for strategic responses to mitigate the fiscal shortfalls. Among the suggested solutions are state aid, the introduction of a local sales tax or congestion charge, and potentially raising taxes on residential properties — though the latter could further dampen the attractiveness of commercial real estate and burden residents.
Boston’s looming financial burden is not unique to the city. A report published by McKinsey Global Institute suggests that office-space values could diminish in other major cities around the world — including San Francisco, London, New York City, Houston, Paris, Munich, Tokyo, Beijing, and Shanghai.
According to the report, “In the nine cities we studied, a total of $800 billion in office-space value (in real terms) is at stake by 2030 in the moderate scenario. On average, the total value of office space declines by 26 percent in the moderate scenario and by 42 percent in the severe one from 2019 to 2030. The impact on value could be even greater if rising interest rates compound it. Similarly, the impact could increase if troubled financial institutions decide to more quickly reduce the price of property they finance or own.”
In response to the looming financial challenges, Boston has initiated efforts to revitalize downtown areas by supporting new businesses to fill vacant storefronts and attract more visitors for various activities beyond work.
