Washington, D.C. Reduces Capitalization Rates for Office Properties Across All Classes

On March 25, 2024, the Tax Year 2025 Pertinent Data Book was released by the Office of Tax and Revenue (OTR) in Washington, D.C. These published guidelines provide taxpayers insight into the data points that the OTR utilizes to determine an asset’s real property assessment for a given tax year. The guidelines include inputs for submarket rents, vacancy, expenses, and capitalization rates, with a limited number of adjustments possible to reflect a property’s operating performance. For office-classified sites, these data points are further divided among Trophy, Class A, Class B, and Class C properties. This data is supposedly extracted from the mandatory Income and Expense filing system.

Office property owners may be surprised to discover that despite overwhelming evidence for increasing cap rates in the District and nationally, the OTR decreased the applied cap rates used to develop the annual assessments from last year’s Pertinent Data Book figures. For tax year 2025, the OTR lowered the cap rates by 25 basis points for Trophy offices, 15 basis points for Class A offices, and 5 basis points for Class B and C offices from tax year 2024 rates. The 2025 office cap rates of 5.40%, 6.30%, 6.70%, and 7.20% are “loaded” with the commercial tax rate of 1.89%. When cap rates are reported on CoStar, in the news, etc., they are reported as “base” or “unloaded” rates. For an apples-to-apples comparison, the OTR is assuming base cap rates of 3.51% for Trophy, 4.41% for Class A, 4.81% for Class B, and 5.31% for Class C. The OTR’s rates are hundreds of basis points below market.

As visualized in the graph below,1 cap rates have steadily increased throughout the most recent quarters. Furthermore, a series of office trades during calendar year 2023 in Washington, D.C. reflect just how far the office market has fallen: multiple recent sales revealed prices that were not only at a fraction of properties’ pre-pandemic sale prices but also a fraction of properties’ current assessed values. The OTR is very clearly lagging behind relevant market indicators, and office owners in the District will be the ones to pay the price, unless these assessments are appealed, and the OTR is challenged accordingly.