Bleak Office Future Changes Projections of DC Revenue in Years Ahead
The office market in Washington, D.C., has seen deep declines since the pandemic, and the upswing of remote work and people refusing to go back to the office in many cases has led to some dire predictions.
This week, Glen Lee, chief financial officer for the District of Columbia, sent a letter to D.C. Mayor Muriel Bowser with revised revenue projections for 2023 and beyond. While the numbers for 2023 were revised upward to show $128 million over original projections for this year, the figures for the future weren’t as rosy. The projections through fiscal year 2026 were revised downward by $464 million.
That’s largely because the forecast assumes a worsening office market, with vacancy rates continuing to rise and rents trending downward. Even though tax revenue from hotels, restaurants and retail properties is expected to continue its path of recovery, the growth is projected to be more than offset by a deeper loss in tax revenue from office properties.
“Although the baseline estimate for real property tax revenue included in this forecast is the most likely scenario, a more pessimistic alternative includes greater deterioration in the commercial office market that could result in additional revenue losses of approximately $80 million to $90 million in the current and next fiscal years, and $150 million annually for the rest the financial plan period,” Lee wrote.
His forecast predicted a continual decline of the District’s office market as vacancy rates rise and rents trend downward, and estimated that lower office values will create a gap that the recovery of hotels, restaurants and retail will not fill.
Bowser responded by suggesting that increasing taxes was not the answer.
“[This] sobering forecast requires us to make even tougher choices in the upcoming budget and underscores the seriousness of the moment we are facing,” the mayor said in response to the letter. “With the ongoing impacts of telework and national political uncertainties, we face another significant test to our local economy. Given these challenges, it would be fiscally irresponsible to try to tax our way to sustainable, long-term growth.”
In the District, employment still lags pre-pandemic levels, Lee noted. As of December 2022, there were nearly 27,000 fewer jobs than in February 2020, with losses concentrated in the hospitality, finance, real estate, business services and federal government sectors, according to Lee’s memorandum.
“Like that of the national economy, the economic outlook for the District has deteriorated,” Lee wrote. “Real gross domestic growth is projected to slow to 0.2 percent in FY 2023. Employment levels are not expected to return to their 2019 peak during the financial plan period, which ends in FY 2027, due to slower growth in the hospitality sector and weak federal and professional job growth.”
Keith Loria can be reached at Kloria@commercialobserver.com.