Like its office building owners, Philadelphia’s government is feeling the pinch of the declining office market.
From tax year 2023 to tax year 2025, the assessed value of offices in the Center City district declined by more than $1 billion, the Philadelphia Inquirer reported.
That was roughly a 10 percent drop. For the most recent tax year, the combined assessed value was $8.78 billion, the Office of Property Assessments informed the City Council on Monday.
Declining values are a more dire threat to office landlords, but pose a significant problem to the city, which receives significant tax revenue from commercial properties.
“Our tax base depends on Center City,” Council member Jeffery Young Jr. stated.
One example is 1500 Spring Garden, where the owners appealed the assessment. In 2022, the assessed value was $192 million; this year, it’s $76 million. That will take a $4 million annual bite out of city revenue, according to the Building Owners and Managers Association.
Vacancy levels in Center City offices have hovered around 20 percent for a year as tenants downsize and embrace hybrid work. Tenants renewing leases are often reducing their space by 25 percent to 40 percent, according to BOMA Philadelphia chair Brent Hutchinson, the CEO of OPEX CRE Management. He labeled the moment a “critical inflection point.”
Vacancies may worsen in the next year when lease expirations are anticipated to peak, Newmark’s Lauren Gilchrist warned. Even with Philadelphia calling its municipal workforce back to the office full-time, daily office worker foot traffic in Center City is only 63 percent of where it was pre-pandemic, according to a business advocacy group.
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More than 10 percent of the commercial mortgage-backed security loans in Philadelphia are in distress, BOMA reported. Sales — the few that are happening — are typically at discounts from past trades.
The City of Brotherly Love is far from the only municipality coping with falling tax revenue from commercial properties. Boston is particularly dependent on the performance of commercial real estate, sparking fears over the summer of an “urban doom loop.”