Owners of office buildings, shopping centers, hotels, and homes in San Francisco are flocking to the county to request a reduction in property assessments and tax payments as the city's real estate prices continue to decline. Some of the biggest landlords in the world, including Brookfield Corp. and Blackstone Inc., have filed for assessment cuts, and the volume of appeals has doubled in the last three years since the pandemic started. Assessments for this fiscal year were distributed in early July, and it is expected that there will be a surge in new appeals before the September 15 deadline to request reductions.
The increase in appeals highlights the broader impact of the real estate downturn in San Francisco, where the return of office workers, shoppers, and tourists has been slow after the pandemic. Lower assessments can result in decreased tax revenue for city services, ranging from police to programs for the homeless. Additionally, if assessors recognize that property values have significantly dropped, it can encourage disinvestment, as property owners who are burdened with debt may choose to walk away from their assets rather than continue investing in properties that are worth less than what they paid.
According to filings with the city's assessors office compiled by Bloomberg, for the fiscal year ending June 30, tax filers in San Francisco requested an average reduction of 48% on property assessed at over $60 billion. While these values include taxable business items such as fixtures and vehicles, the majority of the appeal amounts are related to land and building assessments. Out of the 2,420 appeals heard by the board in the 12 months leading up to June, approximately 55% received a reduction.
San Francisco is not alone in facing these challenges, as landlords across the United States are grappling with shifting real estate demand and rising interest rates that have led to decreased building prices. Cities such as Los Angeles, Chicago, and New York have also experienced a rise in assessment appeals.
In New York, the value of offices is estimated to potentially decrease by 44% by 2029 due to the impact of remote work, which typically accounts for about 20% of the city's property tax revenue, according to a joint study by researchers at New York University and Columbia University. In San Francisco, the situation is even more dire, with Boston Consulting Group predicting that prices for office towers may plummet by as much as 60% compared to pre-pandemic levels. Some property owners have already stopped making mortgage payments to avoid further losses in value.
The decline in real estate prices has also affected the residential market, with the median home price in San Francisco dropping 16% in June compared to the previous year, and residential sales volume decreasing by almost 17%, according to the California Association of Realtors. Experts suggest that San Francisco is still in the early stages of this downturn, and the full impact is yet to be seen.
Despite these challenges, San Francisco has managed to avoid a significant blow to its property tax rolls, with tax revenue increasing by 4.6% to $340 billion for the fiscal year starting July 1. This is partly due to assessments on long-held real estate still catching up to the booming years, as assessment hikes are limited to 2% annually due to a law. There hasn't been a decrease in total assessments since the mid-1990s, following a recession in the United States.
Property owners are not waiting for city assessors to catch up with the current market conditions. For example, Brookfield requested a 75% reduction in the value of an office tower it purchased in 2013, while Columbia Property Trust, acquired by Pimco in 2021, requested a 50% reduction on three office buildings, one of which was part of a portfolio that stopped making mortgage payments earlier this year. Blackstone also requested cuts ranging from 20% to 25% on three office buildings near the San Francisco waterfront, and Equity Residential filed appeals for reductions of up to 20% on five of its properties.
Notably, the initial reassessment requests are often placeholder numbers, as property owners' agents don't have enough time to accurately analyze all the properties filing appeals. It is more advantageous for property owners to ask for a larger reduction at the beginning rather than to take a conservative position and appeal for a deeper discount later.
Some appeals have come ahead of larger issues. The owners of the Westfield San Francisco Centre received a roughly 40% reduction in the mall's assessment back in March, and subsequently, Unibail-Rodamco-Westfield and Brookfield announced in June that they were giving up the property to lenders due to declines in sales, occupancy, and foot traffic.
It is clear that San Francisco's property market is in the midst of a downturn, and the long-term recovery may take several years. However, there are hopes that the city will eventually bounce back despite the existing structural challenges and impediments.