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Boston’s Tax Structure Risks Economic Disaster

Boston's economic stability is at risk due to its dependency on commercial real estate taxes.

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Good morning. Welcome to the weekend edition of CRE Daily.

  • 📰 Feature: Boston’s tax structure risks economic disaster

  • Catch up: The most-read stories from the week

  • 👍️ New Reviews: PropertyShark, Agora, & AirGarage

  • 📈 Chart: Continued price declines in multifamily and office

Today’s issue is brought to you by Calvera Income & Growth Fund.

CAPITAL MARKETS

Boston's Downtown Real Estate is Cratering

Boston's dependence on commercial real estate taxes is pushing it towards an economic crisis. Mayor Michelle Wu’s proposal isn’t helping either.

What happened: Boston's tax structure, with over 30% of its revenue coming from commercial property, makes it uniquely vulnerable. This dependency is higher than in most other major cities, creating significant risk as commercial property values decline.

Property values: A decline in commercial real estate could trigger an "urban doom loop," leading to cuts in city services, reduced attractiveness for residents and investors, and a deteriorating urban environment. Boston Improvement District's foot traffic remains at half of its pre-pandemic levels.

Zoom in: Boston's office market is plummeting, with property sale prices in the central business district dropping by over 30% year-over-year in Q4. Office vacancies in Boston hover around 20%, and last year saw a record increase in new office space availability. The post-pandemic shift to remote work, high interest rates, and costly building requirements are major contributing factors.

➥ THE TAKEAWAY

Looking ahead: Boston's economic stability is at risk due to its dependency on commercial real estate taxes. Mayor Michelle Wu's proposed tax hike on commercial properties has increased tensions with developers, likely leading to higher costs for tenants. Converting offices to residential spaces is seen as a potential but expensive solution. To revitalize the economy, there's also a push to invest in the life sciences sector, tourism, and artificial intelligence.

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⏪ Weekend Wrap-Up

Catch up on the most clickworthy stories of the week.

  • Fear & Greed: 68% of investors plan to maintain their current CRE exposure, up from 66% in 4Q23 and 49% in 3Q23.

  • Hidden exposure: A recent study reveals that large US banks' CRE exposure is significantly higher when REIT debt is factored in, posing additional systemic risks.

  • Price push: The Fed’s Beige Book shows modest US economic growth since April. Consumers are resisting higher prices, with slight job gains reported.

  • Caution: Citigroup downgrades Bank OZK (OZK) due to concerns over its $1B+ in loans, leading to a 14% share price drop.

  • How much lower? Only $5B in multifamily sales were reported by the end of Q1, the lowest quarterly figure since 2Q20’s $4B, and 61% lower YoY. Are we near the bottom yet?

  • Revival: Chicago is offering the most generous subsidies in the nation to convert them into apartments and hotels.

  • Withdrawal: Starwood Real Estate Income Trust, facing a cash crunch, has further limited redemption requests instead of selling assets into a discounted market.

  • Debt dilemma: Concerns over government debt are mounting, with debt nearing $34.6T, potentially driving up CRE loan rates.

  • Nation of renters: National apartment rents were up 1.2% in May, with Syracuse and Columbus leading growth (>20%), while CA markets saw declining demand.

  • High demand: The Reuben Brothers are planning a $2B oceanfront luxury resort in Puerto Rico called Esencia, featuring hotels by Aman, Mandarin Oriental, and Rosewood, with financing from JPMorgan Chase.

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