The Disconnect Between New York City’s Office Real Estate Market and Fiscal Year 2025 Property Tax Assessments

Steve Thompson, Principal

212.871.3901 | steve.thompson@ryan.com

In New York City, the property tax assessment process is backward looking, which typically is to the benefit of property owners and tenants that pay a share of the tax burden. Not surprisingly, the brokerage community has been the most optimistic when it comes to the recovery of the New York City office market. Market data and investor surveys, however, suggest that the recovery is uneven at best and heavily favors trophy assets in prime locations.

The Current State of New York City’s Office Real Estate Market

As of the end of 2024, the Manhattan office market has shown signs of recovery and resilience. Leasing activity reached a post-COVID high, with 35.9 million square feet leased, marking a 17.2% increase from 2023. The overall availability rate dropped to 17.9%, the lowest since 2020, indicating a tightening market. Class A properties saw a surge in demand, accounting for 38.9% of leasing activity, driven by sectors such as media, finance, and law.

Despite these positive indicators, challenges remain. Net effective rents (rents after leasing concessions, tenant improvements, and commissions) declined for Class A properties (according to Avison Young). These mixed signals highlight the uneven recovery across different segments and locations within the city’s office market.

Looking at sales data for office properties in New York City, there were relatively few transactions from which the Department of Finance (DOF) could derive meaningful cap rates and market values per square foot. The following summarizes office prices on a per square foot basis for trades in 2023 and 2024 according to CoStar:

2023 Sale Year

Building Class
min
max
mean
A
$213
$1,121
$546
B
$335
$4,158
$1,518

2024 Sale Year

Building Class
min
max
mean
A
$145
$8,059
$836
B
$150
$807
$361
C
$385
$385
$385

FY 2025 Property Tax Assessments

The New York City DOF recently published the tentative property tax assessment roll for fiscal year (FY) 2025. The total market value of all New York City properties increased by 0.7% to $1.491 trillion, while the taxable assessed value rose by 4.2% to $298.9 billion. Office building values grew modestly, driven largely by the attractiveness of trophy and premium spaces.

However, these assessments are based on real estate activity from January 2023 to January 2024 and income and expense data from 2022. This lag in data collection means that the assessments may not fully capture the current market dynamics, particularly the ongoing challenges in certain submarkets and property classes.

The DOF guidelines appear to point to modest increases in office cap rates, but in many instances, those increases likely do not offset declines in rental rates and higher expenses than in prior years.

The Disconnect

The disconnect between the office real estate market and the FY 2025 property tax assessments can be attributed to several factors:

  • Data Lag: The assessments rely on historical data, which may not reflect the most recent market trends. The declines in rental rates in late 2024 for non-trophy buildings, for example, are not fully accounted for in the FY 2025 assessments.
  • Market Variability: The office market in New York City is highly segmented, with significant differences between Class A and Class B properties, as well as between different boroughs. The assessments may not adequately reflect these nuances, leading to discrepancies in property valuations.
  • Economic Uncertainty: The broader economic environment, including interest rates, inflation, and remote work trends, continues to impact the office market. These factors can lead to rapid changes in property values that are not immediately captured in annual assessments.

Implications for Property Owners

The disconnect between market conditions and property tax assessments has several implications for property owners:

  • Financial Planning: Property owners may face unexpected tax liabilities if assessments do not align with current market values. This can complicate financial planning and budgeting.
  • Appeals and Adjustments: Property owners may need to appeal their assessments to ensure they reflect current market conditions. This process can be time-consuming and costly.

Conclusion

The disconnect between New York City’s office real estate market and the FY 2025 property tax assessments underscores the challenges of accurately valuing properties in a dynamic and complex market. As the city continues to recover from the impacts of the COVID-19 pandemic, it is crucial for assessments to reflect current market conditions to ensure fairness and transparency for property owners. For property owners, staying informed about market trends and actively engaging in the assessment appeals process will be key to navigating this evolving landscape.

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