BOSTON COULD BE facing a huge revenue hole over the next five years if it doesn’t respond to the cratering value of office buildings from the rise of remote work, according to a new report.

The analysis, conducted by the Center for State Policy Analysis at Tufts University for the Boston Policy Institute, a nonprofit started last year by two political consultants, estimated that declining office building values could lead to a 10 percent drop in city revenue, a budget squeeze that would have a dramatic impact on the city’s ability to maintain current services.

High vacancy rates in commercial property as employees continue to work from home or as companies adopt permanent hybrid work schedules following the pandemic are reverberating through the city’s commercial real estate market. The consequences, says the study, will be  falling values that will ultimately translate to lowered tax payments.  

The city’s fiscal 2024 operating budget was $4.3 billion, and 75 percent of city revenues come from property taxes, up from 55 percent in 2002. The city is heavily dependent on commercial property taxes, which account for 58 percent of the total property tax levy, while residential property accounts for 42 percent. 

Office space values are expected to drop 20 to 30 percent by 2029, the report says, leading to an estimated annual revenue shortfall of $400 million to $500 million. 

“A tax falloff representing 10 percent of Boston’s total spending is too large to be offset by creative accounting or other kinds of financial management,” the report said. “The city will need to raise new revenue or reduce its medium-term spending plans.”

The pandemic led to people being able to work from home, either some days or all week, and resulted in a drop in downtown foot traffic downtown, which is still apparent most days. While health care is still an in-person sector and biotechnology companies require lab space, many businesses don’t need the same amount of space they used pre-pandemic, and the reduced demand has led to lower commercial real estate prices and values. “This is not a short-term challenge but the arrival of a new normal,” the report said.

“The rise of remote work, and the corresponding decline in office values, is eroding the tax system in a way that seems likely to last a long time,” the report said. “The challenge—both for the city and the state—is to acknowledge this new reality and find solutions that are equally durable. That won’t be easy, but the alternative is difficult to even contemplate: a permanently diminished city.”

Declining office values could put the city in danger of an “urban doom loop” as City Hall is forced to look at raising taxes or cutting services, said Evan Horowitz, the executive director of the Tufts research center and author of the report. New state aid could also flow from Beacon Hill,  he said, or the solution might be a mix of all three things. “Where I’m hopeful that we can avoid the urban doom loop is the general recognition of how bad it would be,” Horowitz said.

The report noted that the pandemic-driven downturn is “wholly outside the control of Boston policy makers,” and said the city’s argument for more state aid could be bolstered by the possibility of Boston’s “economic distress” spreading to other cities and towns in the region.

Nick Ariniello, the commissioner of the city’s assessing department, said in a statement that he couldn’t comment on a report he hadn’t seen but pushed back on the notion that a financial crisis was on the horizon. The report was provided to reporters on an embargoed basis, meaning it could not be shared with city officials before its release Thursday morning.

Ariniello said Boston’s finances remained stable during the pandemic while other cities outside of Massachusetts faced “dramatic” budget cuts. “This stability is reflected in the AAA bond ratings that Boston has received for the past nine years,” he said. “Although we don’t feel that the current real estate environment is going to lead to budgetary concerns, it is something that we are keeping a close eye on.”

The Boston Policy Institute launched last year, is helmed by Greg Maynard, who has worked on a business-backed super PAC in Worcester and for Revere Mayor Patrick Keefe, and Joe Caiazzo, who has worked for Bernie Sanders and Joe Kennedy III when he ran for Senate against Ed Markey in 2020. It’s structured as a nonprofit that doesn’t have to disclose its donors.