New York City’s property tax system helps explain why a “doomsday” scenario for the Manhattan office market would only result in a modest shortfall in real estate tax revenue — at least in the near term.

A recent worst-case analysis by New York City Comptroller Brad Lander found that a decline of about 40% in the market value of office properties over six years would result in $1.1 billion less tax revenue for fiscal 2027, the last year of the city’s current financial plan. That represents just 3% of the projected property tax levy.

Why aren’t half-filled offices and declining rents triggering bigger revenue losses?

For one, New York doesn’t determine the value of commercial property based on recent sales. Instead, the city sets the value based on lagging income and expense information building owners submit about their properties, and phases in changes in assessed value over five years. The effect of those delays can also find precedent in the downturn in the early 1990s.

“Part of the story of the city’s property tax system is that it’s got a lot of lag built into it,” said George Sweeting, former deputy director of the city’s Independent Budget Office.  “All the changes get phased in and they get phased in over a fairly long period of time.”

Looking at the current fiscal year starting July 1, valuations on the city’s assessment roll are based on information filed for calendar 2021, according to a spokesman for Mayor Eric Adams.

Real estate taxes are the biggest contributor to New York City’s coffers, providing about 30% of the revenue for its current year $109 billion budget. Offices account for 20% of the city’s property tax revenue and 10% of overall revenue. As businesses shift to remote or hybrid work for many jobs, the city projects office vacancies to peak at a record 22.7% this year, raising concern about the impact on tax collections.

Lander’s scenario was based on a recent study by researchers at NYU Stern School of Business and Columbia University Graduate School of Business, which found that a decrease in lease revenue, renewal rates, occupancy and office rent would cut the value of office buildings in the city by 44% over the next six calendar years.

Because of the gradual nature of office valuations based on net operating income, the comptroller assumes that office market values would decrease 6% annually from fiscal 2025 through fiscal 2027, with further declines until 2031.

To be sure, the comptroller’s analysis doesn’t estimate the indirect impact of a drop in office occupancy on city tax revenue — such as the repercussions for commercial real estate lenders or spill over effects on restaurants and shops.

While the outlook for New York’s office market is grim, the real estate downturn of the early 1990s provides some historical perspective on risks to the city’s coffers.

Back then, an oversupply of office buildings built on speculation, a deep recession and an exodus of back-office operations led to a commercial real estate bust.

However, assessed values for commercial space didn’t start falling until the 1994 fiscal year.

From peak to trough, assessed values fell by 13% through fiscal 1998, according to the comptroller’s report. By then, the city was in recovery, said Sweeting, currently a senior fellow at the Center for New York City Affairs at The New School.

“Again, you get the effect of the lags delaying the impact of economic conditions on the property tax,” said Sweeting. “Doesn’t avoid them, but they just come later.”

This article was provided by Bloomberg News.