Canada’s empty office cubicles are sparking concern that they could wreak havoc on municipal budgets across the country as vacancies result in lower property valuations and tax revenue.
As a result, some cities might have to shift more of the tax burden to residential property owners, according to a new study from the Quebec Urban Development Institute.
The findings come as the national office vacancy rate increased to 18.4% in the first quarter, according to the latest numbers from brokerage CBRE.
Though the challenges posed by empty offices are widespread, not all cities will see their budgets affected equally because municipal taxation rates vary. Even so, no Canadian city is expected to be hit as badly by the lower office occupancy as Montreal, where municipal authorities rely on commercial property tax revenues more than any other city, according to the Quebec UDI study.
The study projects the lower commercial property valuations will cause Montreal to suffer a loss of $164 million in revenue from 2026 through 2028.
The lost dollars will pack a wallop to a city budget that came in at almost $7 billion this year. Just over half of the revenue for the budget comes from property taxes, the highest rate of any municipality in Quebec.
Montreal’s Class A office properties are projected to see the total valuations of their properties reduced from $8.1 billion to $6.67 billion during the three years, and that will result in a drop of $97 million in property taxes collected, according to the study. Class B tax revenues will decline by $67 million during those three years, according to the UDI data.
Residential Tax Hike Concern
Montreal may be hard-pressed to further increase residential property taxes, after raising them by 4.9% in 2024 and by 4.1% in 2023, to make up for the expected tax shortfall. The UDI wants the city to try to recoup the lost cash through fees on services used rather than increased property taxes, as stated in the document submitted as part of pre-budget consultations in Montreal.
The Quebec UDI notes that Montreal taxes properties at $34.51 per $1,000 of valuation, much higher than the valuation rates of $21.70 per $1,000 in Toronto and $22.07 in Vancouver. Only Quebec City, at $36.01 per $1,000 of valuation and Halifax at $34.54 have rates higher than Montreal's. Elsewhere in Quebec the rate per $1,000 of valuation ranges from $13.19 in Mirabel to $29.56 in Longueuil.
A large number of Montreal’s downtown office buildings are located in the Ville Marie borough where office vacancies have jumped from 7.5% in 2020 to 18.5% in the most recent report.
Some of Montreal’s downtown office buildings have fought the wave of vacancies by investing in upgrades, including a $20 million renovation to the Sun Life Building laid out by its owners Sun Life, Petra and Mach. Though those owners might welcome the possibility of receiving a tax bill lower than the $9.2 million they paid to the city this year, the lower valuation could cause financing challenges because lenders might not agree to finance a property at the same rate after its value was lowered.
Montreal's online tax documents demonstrate the high taxes paid by office owners. For example, the owners of the Dominion Square Building paid $4.1 million in municipal taxes to the city of Montreal this year. The owner of 1250 René Lévesque paid $18 million and the proprietor of 671 De La Gauchetière $2.5 million, according to Montreal's Evalweb online tax records.
The other end of Canada's office spectrum has also seen considerable unpredictability in its tax valuations but not necessarily for the same reasons.
Vancouver's Healthier Market
Vancouver has been Canada’s most resilient office market. Its first-quarter vacancy rate was 9.5%, according to CBRE.
Office properties form a part of a larger commercial category that includes retail and industrial properties and their downward market values led to a decrease in the assessment role of 7% in the city of Vancouver, according to Paul Sullivan, a principal and regional leader at Ryan ULC, a property tax firm that serves as tax authority for the British Columbia branch of the Urban Development Institute.
“The downtown office buildings have a disproportionate downward change in value to the rest of the commercial assessment role and therefore the result is that taxes flow out to other properties," Sullivan said in an interview. “And so we have this constant shift between property types depending on how the market views their values and this affects the distribution of taxes.”
Sullivan notes that Vancouver is no stranger to dramatic shifts in tax valuations, as condos have forced land valuations much higher in recent years, causing considerable volatility in the tax bills in a variety of real estate categories.
Though paying lower taxes on an office property might be appealing, he said, having a building assessed at a lower value is not something to be embraced.
"Nobody likes to see their worth depreciated. If your property is devalued for taxation, it’s probably devalued in the marketplace as well," Sullivan said. "That may or may not upset your financing. Most people have financing on properties and if they are highly leveraged properties and the value goes down 20% or 30%, you might need to add equity to maintain your financing."