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Friday, Apr 12, 2024

Office Utilization: An Issue the City Cannot Afford to Ignore

There are many concerns surrounding the office market: office utilization, lender and investor appetite, construction and operating costs, functional obsolescence, and the list continues, but property taxes should top the list as most vexing in the City of Los Angeles. A local government’s property tax budget is generally the largest source of revenue, and nearly 22 percent of the city’s 2022-2023 budgeted revenue will come from property taxes. Suppose office property values decline by 50 percent or more. In that case, the city will struggle to pay for necessary government services, putting additional downward pressure on property values and creating a circular pattern that becomes very difficult to break.

The city may not be able to control rising interest rates, but homelessness, crime, cleanliness, transportation, and affordable housing are within its control. These issues also significantly impact office utilization and could lead to significant property value decline in a rising interest rate environment.

As just one example, there is roughly 38 million square feet of office space in Down- town Los Angeles. At an average property value of $250 per square foot and an approximate tax rate of 1.25 percent, the city’s 27 percent share of the Downtown office property tax base would be approximately $32 million. If discounted property sales cut assessments in half, the city would lose $16 million of revenue from the Downtown office properties alone. The reality is office values could quickly decline by much more, and office utilization is down across all Los Angeles. Office utilization also directly impacts retail and multifamily performance and valuation.

The city should have the same goal as its property owners and do what it can to get people back into the office before declining property values and city services become a pattern that leads to permanence.

Humbly, this article does not attempt to devise a solution to these problems. Instead, the intent is to call attention to the need for a community of thought leaders to create safe and clean environments where people want to work and live. This article intends to highlight that office utilization is a problem the city cannot afford to ignore.

Sean Fulp is vice chair and head of office capital markets,
U.S. southwest region for Colliers.

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