Boston’s Downtown Real Estate Is Collapsing. This Is Ominous.

Longform

Photo illustration by Benjamen Purvis / Photos via Getty Images

From the gleaming office buildings that tower over Boston’s Financial District—including an upper-floor conference room at One Financial Center, where a who’s who of the Massachusetts commercial real estate world looked out one January day and saw a city shaped by their handiwork. Assembled for a board meeting led by Tamara Small, head of a powerful industry trade group, bigwigs in attendance represented major firms such as HYM Investment Group (developers of the Boston Landing complex in Allston and the reimagined Suffolk Downs), National Development (the Ink Block), and Samuels & Associates (Lyrik Back Bay), as well as familiar names from bigtime construction projects across the region, including Suffolk Construction and Skanska.

In past years, the panorama before them would’ve been a high-rise testimony to the decades-long Boston construction boom that these developers, investors, and builders have helped nurture, a source of pride to the architects of a downtown golden goose that’s been key to the city’s economic renaissance and launched many personal fortunes. But on this winter day, the vista was pockmarked with signs of impending doom.

Just a half-mile away was 281 Franklin Street, worth $6.1 million in 2017, unloaded this past February for $3.8 million—a 38 percent falloff. Two blocks north, 186 Lincoln Street, with nine stories of office space, sold last fall for $11 million—a 47 percent drop from its $20.7 million 2015 purchase price. And to the north, at 125 Broad Street, sat one of downtown’s most extreme haircuts, bought for $14 million in 2018 and sold in December for $3.9 million—a 72 percent decrease.

It’s not just the Financial District that’s been racking up casualties of the Great Post-Pandemic Commercial Real Estate Crash. Down in the Bulfinch Triangle near TD Garden, an office building at 110 Canal Street recently changed hands for the second time in two years, with the seller swallowing a $6.1 million loss. And more than 34,000 square feet in the antique building at 33–41 West Street across from Boston Common, which fetched $16 million just eight years ago, sold last September for $4.1 million—a 74 percent markdown more reminiscent of the old Filene’s Basement than Boston’s once-thriving downtown. According to investment-data provider MSCI, property sale prices in the central business district cratered in the fourth quarter of 2023 by more than 30 percent year over year, a decline steeper than any other city MSCI tracked, including Chicago, Manhattan, San Francisco, and Washington, DC.

All of this hemorrhaging has a common denominator—the rapid and seemingly lasting rise of remote work, sparked by COVID-era fear and sustained by commuters’ discovery that it’s cheaper and less stressful to skip the commute into Boston if and when you can. Mix in the burden of high interest rates and a slew of expensive new building requirements and proposed new sales taxes from City Hall, increasing the cost of building office space, and it’s no wonder that when Small, CEO of the Commercial Real Estate Development Association (NAIOP), called for a show of hands from developers planning to put shovels in the ground during 2024, the response was underwhelming. “Very few hands were raised, and those were for outside of Boston,” she recalls. “There were no hands for Boston.”

So who cares about the financial stress of a few fat-cat property owners? As it turns out, we all should. The commercial real estate collapse of the 2020s has the potential to cause catastrophic collateral damage to the city, according to a bombshell report released this year by the nonpartisan Boston Policy Institute and the Center for State Policy Analysis (CSPA) at Tufts. The report suggests Boston, which reaps more than 30 percent of its tax revenue from commercial property—more than any other major U.S. city—may be in danger of falling into the dreaded “urban doom loop.” The recently coined term refers to what happens when cities see a sharp decline in commercial activity, and large chunks of revenue vanish as developers stop building and property owners seek tax reductions on their devalued holdings. This, in turn, forces drastic cuts in the basic services—cops, schools, sanitation, and transportation—that make cities livable, which in turn leaves the place even less attractive to investors and encourages residents to flee.

In fact, we could be headed for a world in which Boston’s annual tax collections run as much as $500 million below the current haul, a deficit that’s roughly an eighth of the current city budget. “The bleakest scenario is something like a return to the urban experience of the 1970s, a desiccated city where a lot of the energy has left and moved elsewhere,” says Evan Horowitz, lead author of the CSPA report. “It’s not purely hypothetical. You need to deal with it.”

Horowitz is far from an isolated voice sounding the alarm. Over the past three years, analysts at Eastern Bank, researchers in the offices of major local commercial property investors and developers, and other local think tanks have all come to the same conclusion: The bottom is falling out of Boston’s once gold-plated office-space market, with potentially dire consequences for the city.

Disaster movies involving skyscrapers are part of America’s cultural canon—and while the situation here isn’t quite as dire as the terrorist attack on the swanky Nakatomi Plaza in the classic Christmas movie Die Hard, neither does there seem to be much hope of a Bruce Willis–style miracle rescue by our elected leaders. After scoffing at the warnings, Mayor Michelle Wu’s administration stunned property owners this spring by proposing the one idea few outside of City Hall seem to think has even a chance of fixing the problem: a tax hike on the beleaguered commercial holdings themselves (which would likely get passed on to tenants, forcing them to downsize their office footprint or flee). It’s a move arguably more intended to curry favor with voters in the upcoming election than keep Boston safe from the doom loop. Coming on top of a string of initiatives deeply unpopular with real estate owners, including an attempt to restore rent control and adopting a surtax on property sales worth more than $2 million, the tensions between Wu and local developers have never been higher.

At the same time, other immediate options for averting catastrophe seem either politically unpalatable or unlikely. Extracting more money from relatively undertaxed residential properties? A politically toxic non-starter in an election year for the mayor, who has said, “I cannot have that happen.” Seeking relief from the state? Given the traditional strain between urban and suburban priorities, good luck with that. And while officials are exploring ideas to deal with the ever-increasing office-building vacancy rate, such as converting empty offices into desperately needed housing, the economic viability of that solution is somewhere between questionable and laughable.

So what is the remedy? “The challenge—both for the city and the state—is to acknowledge this new reality and find solutions that are equally durable,” the CSPA report concludes. “That won’t be easy, but the alternative is difficult to even contemplate: a permanently diminished city.” That means no matter what, now is a moment that begs for strong leadership and tough choices. After all, as the report points out, Boston’s current and former leaders may not be at fault for this looming crisis, which it terms “an economic act of God.” But given that neither God nor Bruce Willis is parachuting in to save Boston, it is their problem—and their responsibility to stop it.

Eastern Bank CEO Bob Rivers has recently been sounding the alarm over Boston’s commercial real estate crisis. / Photo by Blake Nissen for the Boston Globe via Getty Images

Like many bankers, Bob Rivers has always been a cautious optimist, balancing Wall Street number-crunching with Main Street miracle-making. And generally, that’s served the Eastern Bank CEO well on his way to becoming one of the city’s most respected civic leaders. So even as he watched white-collar workers empty out their cubicles and flee the Financial District during the pandemic, Rivers held out hope that the arrival of COVID vaccines and the passage of time might reverse the hollowing out of the neighborhood, home to his bank’s headquarters. Ever hopeful, he even paid for employees to park underneath the building, he says, to help ease the transition of getting back to work IRL. But it wasn’t enough to entice workers to return to the office full-time.

Then, in late 2023, Rivers saw something that further shattered his sunny outlook: a simple line graph of weekly foot traffic entering the downtown area compiled by the neighborhood’s Business Improvement District. A light-blue line showed the 2019 pre-pandemic figures: around 1.2 million people passing through each week. An orange line traced the vertigo-inducing COVID crash of 2020 between 100,000 and 200,000. And while traffic eventually recovered somewhat, throughout most of 2022 and 2023 it remained stuck between 500,000 and 700,000, barely half of the old normal. After years spent working from the comfort of home, very few workers, it seemed, were eager to get back to a mind-numbing commute. “Oh boy, we’re not getting a lift,” Rivers remembers thinking at the time. “I was convinced we were in stasis—this is over.”

Current statistics support his conclusion. As a result of the new work-from-home paradigm, Boston set an unwanted record in 2023, when it marked the biggest-ever one-year increase in new office-space availability, according to a year-end report from behemoth real estate firm Jones Lang LaSalle (JLL). That might have been welcome news in the pre-pandemic days, when commercial buildings were nearly full and businesses were clamoring for a place to house their workers. But vacancy rates are now more than 20 percent and rising, and JLL forecasts a continuation of the trend, with major declines in rent prices and rising landlord concessions.

Meanwhile, the CSPA report estimates that office-space value over the next five years will decline 20 percent, a figure Rivers believes may be “too low by half.” And that could spell trouble as property owners seek abatements, or reductions in the amount of tax they pay to the city, to reflect the collapse, leading Boston’s revenues to quickly erode, with few ways to make up the shortfall. “It’s a tough spot,” says David Greaney, founder and CEO of Synergy, a major Boston commercial real estate company. “I believe in Boston, but office is a four-letter word these days.”

Could this be just a brief blip on the radar? Highly unlikely. Real estate is subject to economic cycles, and in most of them, the common view of investors is “it’ll come back,” says Matthew Osborne, chief credit officer for Eastern Bank. But “this is different, because this is not a cycle—it’s a paradigm shift.” He compares Boston’s faltering offices to the mill buildings that housed New England manufacturing in its long-gone heyday. Most of them sat empty for decades, and some still do, a blighted reminder of another paradigm shift that proved permanent: the flight of manufacturing to the South, West, and overseas.

If experts are right, Boston—for all its cachet as a magnet for the young, educated population that sustains attractive cities nationwide—might one day be a candidate for the dreaded doom loop.

If these experts are right, Boston—for all of its cachet as a magnet for the young, educated population that sustains attractive cities nationwide—might one day be a candidate for the dreaded doom loop. All of that has been frightening enough to prompt Rivers to wave the red flag. He’s been sharing his concerns for several years now with colleagues, friends, and political leaders. He started a working group to come up with solutions. In the meantime, he says he gets a daily reminder of how bad the situation is when he walks from his home in the bustling Seaport to his office in the comparatively empty Financial District. “This is death by a thousand cuts,” Rivers says. Turning it around, he believes, will require all hands on deck and “all the ideas you can get.”

Mayor Michelle Wu has proposed combating the so-called doom loop by raising taxes on commercial buildings in the city. / Photo by Jessica Rinaldi/the Boston Globe via Getty Images

Paging Mayor Michelle Wu, spotted finessing the topic of the commercial real estate crash at a late-winter New England Council event at the Park Plaza Hotel. With a portrait of George “I cannot tell a lie” Washington looming over her shoulder, the mayor was all smiles as she recited a litany of good news about the city’s economy that “shows what is possible when all of our sectors are on the same page.” There is “steadily growing foot traffic downtown,” she boasted to the business bigwigs in attendance, without offering the context of the chart that had appalled Rivers. “The number of vacant storefronts [downtown] has declined by nearly 17 percent in the last year…there are more restaurants open today in the Downtown Boston Business Improvement District than before the pandemic.”

And the bad news? “We know that downtown commercial property values continue to be a point of concern,” she said. “We’ve been having conversations with property owners [and] business leaders and continue to plan out all of the appropriate steps ahead to mitigate the impact on residents and businesses while maintaining the vibrancy that defines our city.” Translation: Nothing to see here, folks! Move along!

That didn’t deter New England Council president and CEO James Brett from delicately bringing up the recently released CSPA report: “A rain cloud is about to appear in the sky,” he remarked to the group. The mayor’s face clouded over as she mulled her response. The coming storm “will have an impact in terms of how we think about our tax base,” Wu acknowledged. “It is slightly different, though, than how that report was envisioned.” In her telling, the real risk is not to the golden goose of growth driven by commercial development but that the loss of commercial revenue might temporarily put upward pressure on the city’s low residential tax rate.

The political priorities embodied there—residential property owners over wealthy commercial developers, populist politics over growth—should be no surprise. As promised during her 2021 mayoral campaign, Wu has pushed a series of initiatives opposed by the real estate sector, including the revival of rent control; major increases in the amount of less-profitable affordable housing that developers must include in new projects; hiking so-called linkage fees they pay to help fund low-income housing and job training; and a proposed new 2 percent tax on property sales of more than $2 million. It’s an agenda, according to NAIOP’s Small, that’s diverting investment from the city. “People say, ‘I can’t make the numbers work,’ and they look to markets outside of Boston,” she says.

So it was little wonder when, two weeks after the New England Council event, Wu proposed a solution to combatting the so-called doom loop that has been likened to slapping a surtax on snow shovels right before a snowstorm—a home-rule petition seeking necessary permission from the state legislature to sharply increase the city’s commercial property tax rate. “I wish we had the ability not to rely on property taxes for three-quarters of how we pay for city services,” she said in an April interview, but “we’re trying to be proactive so we can be prepared for any situation.” The proposal, however, was quickly met with criticism. “To squeeze the industry like this is troubling,” says Greg Vasil, CEO of the Greater Boston Real Estate Board. “If you drive the cost of doing business in Boston to a point where it’s unpalatable, people can go elsewhere and spend their money elsewhere.”

Even the Boston Globe’s editorial board gagged on the mayor’s response, scolding City Hall for being “in denial” about the problem and quoting Marty Walz, interim president of the nonpartisan watchdog Boston Municipal Research Bureau, warning that “there is a risk of creating too great a burden on these taxpayers.”

Wu’s response: an in-your-face April 11 speech to Walz’s group in which the mayor slammed the door on an idea she floated just last September of a temporary tax incentive program aimed at breaking a logjam of construction projects stalled by high interest rates. “At this moment, that isn’t in the best interests of our residents,” she said.

Coming just days after Wu unveiled a new budget proposal that hiked spending by 8 percent while dismissing the CSPA report’s warnings with a Trump-like swipe at “false information,” her speech cemented what may be the most negative part of Wu’s public image: an ideology-driven myopia about, and hostility toward, the real estate industry that her progressive mentor, Thomas Menino, and predecessor, former union leader Marty Walsh, both eschewed. “I’m struck by what a narrow solution she’s putting forth,” says Walz of Wu’s proposal, asking, “What is she doing to cut expenses?” For his part, former City Councilor Larry DiCara says that “perception is reality in this business, and the perception is that she’s anti-business.”

For DiCara, it’s déjà vu all over again. He served in elected office around the time of then-Mayor Kevin White’s 1982 push to get the state to bail out the city from insolvency brought on by, among other factors, over-assessment of struggling commercial properties. In an essay last fall, DiCara wrote that the current gap between assessment and actual value “could prove to be dire. It is likely that well-educated lawyers assisted by appraisers and, perhaps, economists will make the case soon that there needs to be a significant adjustment in the assessments of office buildings, which have now decreased in value after decades of consistent increases.”

Yet that warning, like those of Rivers and other business leaders, has been greeted by the mayor with an alternating menu of dismissiveness and grudging semi-acknowledgment. And City Hall’s most significant stab at a short-term remedy thus far—a pilot program offering dramatic tax cuts for downtown-office-building owners who convert their properties to residential use—has yielded paltry results since its launch last fall. The deadline for applications is looming at the end of this month; in late March, Wu claimed there were “nearly 200 units of housing…already in the pipeline, with some of them already officially approved.” By comparison, the five leading cities in office-to-apartment conversions—Washington, DC; New York; Dallas; Chicago; and L.A.—have thousands in the works, according to a list published in February by Fast Company. “I definitely don’t think that’s gonna make much of a difference” to the looming revenue crisis, says Peter Cohan, a Babson College management professor who’s been studying the conversion push. “If there were big incentives brought in to bring fast-growing companies into those spaces, that could possibly lead to some taxable income in the future.”

So far, that doesn’t seem to be the case. While the Boston program comes with steep tax breaks, developers willing to take the plunge must also shoulder all of the Wu administration’s expensive demands, including the affordable housing requirements and the new surtax on multimillion-dollar deals that become deal-breakers for many developers. By contrast, other progressive cities, including San Francisco, are relaxing similar mandates to jump-start the residential reinventions. There was “a lot of grumbling” in housing-advocate circles, John Avalos, executive director of the Bay Area’s Council of Community Housing Organizations, told the Wall Street Journal. But “we had to be able to give up something to change market conditions for any kind of development.”

Would Boston follow suit to avoid the doom loop? Veteran developer Bruce Percelay of the Mount Vernon Company is pessimistic. “The irony is that the absence of incentives for developers to build more housing is hurting the very people the city is trying to protect,” he says. “The quickest way to lower rents is to increase supply, which the city desperately needs.”

Photo illustration by Benjamen Purvis / Photos via Getty Images

Wu’s proposal to stick it to Boston’s commercial real estate industry may rankle office-building owners and concern analysts, but there’s little doubt that her class-conscious populism makes for good mayoral reelection politics: Consider that in 2022, 65 percent of Bostonians voted in favor of the “millionaire’s tax,” which slapped a surtax on incomes of over a million dollars—just surpassing Wu’s 64 percent haul in the 2021 mayoral race. “Every mayor plays election-year politics,” DiCara says. “It’s instinctive.” And Wu’s position against raising residential taxes “probably bolsters her in some neighborhoods where she didn’t do well in the 2021 election—coastal Dorchester, West Roxbury—where people pay a lot in taxes.”

Yet while Wu may have an ironclad handle on what many city voters want, the dynamic on Beacon Hill, which could play a crucial role in minimizing damage to Boston from the commercial-value crash, is a different story. Governor Maura Healey’s recent implementation of a partial hiring freeze was just one symptom of Beacon Hill’s growing concern about future budget balancing, casting doubt on prospects for more state aid to Boston. Asked recently whether she’d have Boston’s back in the event of a future need for some type of bailout, Healey responded, “I think it’s premature to talk about because we don’t know what the numbers are. We’ll have to see.”

Meanwhile, Wu’s bid for state permission to raise the commercial tax rate is no slam dunk, and could well wind up in the same legislative purgatory where her much-touted rent-control legislation currently languishes. After all, though the mayor has presented her home-rule petition as a repeat of Menino’s playbook from 2003, when Boston last sought relief from the cap on commercial tax rates after the dot-com bubble burst and stalled economic growth, there are big differences. Menino was 10 years into his mayoralty with a strong pro-development reputation and had aggressively trimmed city spending before going after new revenue. “People want to see some effort to cut spending first,” says City Councilor Ed Flynn, whose father, former Mayor Ray Flynn, found it difficult to get approval for his efforts to expand revenues in the 1980s.

There are other reasons to be doubtful of Wu’s bid to raise commercial tax rates. Between 2011 and 2021, less than half of the hundred or so Boston home-rule petitions made it through, according to a Boston City Council analysis cited by the Globe, and aside from allies within the outnumbered Boston legislative delegation, it’s a mystery where Wu’s political support will come from. Case in point: While Senator Peter Durant, a Republican representing bedroom suburbs and rural communities just west of Worcester, believes that a robust Boston is crucial to the economic health of the region, he sees Wu’s petition as “hubris” that could, if successful, open the door to demands for expanded taxing authority elsewhere. “Are you willing to open Pandora’s box?” he asks, a question that could resonate among legislators from both parties wary of anti-tax backlash from constituents.

As Wu tries to brush off the current warnings, she is counting the ways in which Boston remains in better shape than many other cities, including low unemployment, concentrations of jobs in sectors such as healthcare that require in-person work, and the continued attractiveness of luxury Class A office space even as less-expensive Class B properties struggle. “We don’t know for sure if we will even need this provision,” Wu said as she unveiled her tax-hike petition.

Meanwhile, Doug Howgate, president of the nonpartisan Massachusetts Taxpayers Foundation (MTF), says not having a comprehensive plan to stave off the looming crisis is simply not an option. If Boston gets caught in the doom loop, disrupting the city’s attractiveness as a place to live, work, and visit, it really is doomsday, he says, where “no model of public finance works.”

What to do? Howgate, for his part, has no shortage of ideas, some of which have been talked about in state and city government circles. A recent report by his group suggests that investing in the city’s biotech industry—where many of the jobs still require workers to come into the office or lab—could help stall any slide into the doom loop. Tourism is another area the city could potentially mine for tax revenue. “During the pandemic, we saw how it really matters,” says Howgate, who suggests looking at powerhouse urban events such as Austin’s annual South by Southwest festival of culture, tech, and the arts for inspiration. And where’s Boston’s piece of the fast-growing artificial intelligence pie, he asks? It’s an industry that’s already helping San Francisco shore up its commercial real estate doom loop. “We kind of blithely assume Massachusetts will be a leader there, but we can’t just assume the past entitles us to future success,” Howgate says.

Others have suggested getting more creative with the office-to-residence conversion effort: Could some of those high-rise buildings, so expensive to divide into condos because internal plumbing and infrastructure are concentrated at the building’s core, be perfect instead for the kind of semi-communal living college students are used to, thus freeing up existing conventional apartments for others? Would hospitals subsidize housing healthcare workers in office buildings near the workplace, consolidating their shifts so they can split their time between the city and their homes?

These are all big-picture ideas that officials would be wise to interrogate. Or the Wu administration, locked in a bitter legal battle with the city of Quincy over rebuilding the bridge to the old homeless services center and rehabilitation facilities on Long Island, could swallow hard and look to its nemesis for a case study in how to revive a downtown. Two decades ago, Quincy Center was an eyesore, blighted by the evacuation of commerce to South Shore Plaza and a lack of attractive residential space. Mayor Thomas Koch, though, was able to jump-start a mixed commercial/residential construction boom by slashing red tape, investing in public improvements, and speeding up the process. Now, projects that might take years to get the green light in Boston often get a thumbs up in Quincy in months. Both residential and commercial tax rates there have been trending downward. “The magic mix is to make it easier,” Koch says. “We’ve had a real uptick of value.”

As the continued struggles of old Massachusetts mill towns like Lawrence and Holyoke demonstrate, unexpected changes in economic and social fundamentals can quickly destroy business models that have worked for generations and be painfully slow to recover from, if recovery is even possible. In this case, the pandemic threw a devastating curveball at our economic status quo that shattered a lot of long-standing assumptions about how cities work. Politicians from Capitol Hill to City Hall Plaza have been left to deal with the still-unfolding consequences. And while they can plausibly deny culpability for a set of disruptions they didn’t cause and couldn’t have predicted, the tradeoff is that they cannot think small or act casually. “We’ve got to reimagine the city of Boston,” Rivers says.

There are no obvious magic bullets, no Hollywood-style saviors in the wings. But there’s also no reason to think Boston’s greatest resource—brains—can’t find a way to avoid the doom loop. Unless, that is, our leaders pull the covers over everyone’s heads, cry “false information,” and play pretend.

Bargain City

Photo via Google Earth

110 Canal Street

29% falloff 

2021 Purchase Price: $20.7 million
2023 Sale Price: $14.6 million

Photo courtesy of Newmark

281 Franklin Street

38% falloff

2017 Purchase Price: $6.1 million
2024 Sale Price: $2.8 million

Photo courtesy of Newmark

186 Lincoln Street

47% falloff 

2015 Purchase Price: $20.7 million
2023 Sale Price: $11 million

Photo courtesy of Newmark

125 Broad Street

72% falloff 

2018 Purchase Price: $14 million
2023 Sale Price: $3.9 million

Photo via Google Earth

33-41 West Street

74% falloff 

2016 Purchase Price: $16 million
2023 Sale Price: $4.1 million