By Paul Schwedelson – Reporter, Philadelphia Business Journal
Philadelphia officials expect the total assessed value of office buildings across the city to drop by an estimated $1 billion as property owners battle financial woes and vacancy rates continue to rise.
Finance Director Rob Dubow said the sinking valuations had to be factored into Mayor Cherelle Parker's $6.29 billion proposed budget for fiscal year 2025, released Thursday, and the city’s five-year plan, as the plummeting value of office buildings means fewer property tax dollars flowing into city coffers.
While Philadelphia does not lean on property tax revenue as heavily as some other big cities across the country, Dubow admitted the significant reduction of assessed values across the office market is "a big concern."
“We are different from a lot of governments in that we’re really dependent on wage tax rather than property tax,” he said. “The office sector is a small percentage of our property tax. So it’s a concern, it’s something that we’re building into our plan. It will be a hit to revenue.”
Dubow attributed the projected $1 billion decline to a flurry of assessment appeals. As office property owners witness the sinking value of their buildings, they’re petitioning the city to adjust their assessments accordingly. The vacancy rate for Philadelphia office buildings is creeping toward 25%, and reduced leasing revenue and rising interest rates over the past two years have squeezed property owners with floating-rate loans.
In January, Centre Square owners Nightingale Properties and Wafra Capital Partners negotiated a decrease in the assessment of the two-building office complex for both the 2023 and 2024 tax years. The 1500 Market St. property has been in receivership for almost a year after its owners failed to pay off a $368 million commercial mortgage-backed security (CMBS) loan on the property before its maturity date, according to CMBS reports.
he city's Board of Revision of Taxes approved a 31% reduction in Centre Square's property tax assessment, previously set at $362.6 million, to $250 million for 2024 and dropped the 2023 assessment 24% to $275 million.
Based on Philadelphia’s property tax rate, Centre Square's owners are now responsible for paying about $3.85 million in property taxes for 2023 and $3.5 million for 2024. That’s a reduction from $5.1 million in taxes that would have been owed in each of the two years had the assessment remained the same, giving Nightingale and Wafra a combined savings of more than $2.8 million.
The uncertainty surrounding the future of office space has led to a lack of office building sales in the last few years. In turn, accurate assessments have become more difficult to achieve, industry experts say, because there’s little sales data to set current market prices.
A few recent and potential sales could soon provide some clarity.
A four-building Old City office portfolio was recently handed over to a lender, which is now in talks to sell at least two of the buildings. On the other side of City Hall, a 15-story office building at 1760 Market St. was recently listed for sale and positioned as a potential conversion to residential.
Last fall, Alterra Property Group bought a nearby 18-story office building at 1701 Market St. for $26.25 million and is now converting it into 299 apartments. Less than a year prior to the sale, the building was under contract to sell for nearly double that price.
In recent weeks, Parker has made a public push to encourage businesses to bring workers back to offices. While the long-term effects are still playing out, increasing the occupancy of office buildings would help both property owners and the city.
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