Aggressive Assessments Could Lead To Double-Digit Percent Growth For Some Commercial Property Values In DFW
Commercial property owners in DFW, especially those of high-performing asset classes in desirable submarkets, should be prepared to see significant jumps in value once they begin to receive their estimates next week, area property tax experts say.
“The big thing that has happened on the commercial side in the DFW area … is that it was always considered a Tier 2 market,” said Maher Maso, principal of Ryan LLC’s Dallas office. “Four or five years ago, it really became a Tier 1. Appraisal districts have been catching up with those valuation changes.”
County appraisal districts are responding to record-high transaction volume and historically low levels of supply by adjusting values to more accurately reflect activity in the market, said Jon Redmond, vice president of Alliance Tax Advisors. An existing property’s value is based on a variety of factors, including sales prices of similar properties as well as rent and vacancy rates. For new construction, values are based on construction costs until the property is stabilized.
Harris and Williamson counties value estimates, which have already been mailed out, are showing increases of between 30% and 40%. DFW property owners should expect to see similar jumps, Redmond said.
“They’ve been extremely aggressive right out the gate,” he said. “We definitely expect the 2022 values to come out really high.”
Value changes will vary based on asset class, said Jeff Tutill, principal and regional leader of the commercial property tax division at Ryan’s Dallas office. As they are nationally, industrial and multifamily are the strongest performers of the past year, but Tuthill said the rebound in office will also spur significant increases, specifically among well-located, Class-A properties.
“Office, apartments and industrial you will see double-digit percentage increases coming out of the gate,” he said. “Then there will be appeals and when the dust settles, on primo assets, it could be year-over-year 7-10% increases even after protests.”
After a dismal 2020, high levels of leasing and occupancy triggered a comeback for DFW retail in 2021. According to Weitzman, the market saw nearly 4M SF absorbed last year, the third-strongest leasing market in 22 years. Value changes won’t be as aggressive as other asset classes, but retail property owners should expect an increase.
“The first couple of years [of the pandemic], with all of the store closures, the appraisal districts weren’t really aggressive, and retail values were basically flat,” Redmond said. “But all of the sales and rental activity in 2021 showed a significant rebound, and we expect in 2022 for appraisal districts to raise values.”
Texas law requires that properties be reappraised at least once every three years, but with the market as hot as it is, almost all commercial properties are being reappraised, Tuthill said. When it comes to property’s assessed value, location matters, and top-quality properties in high-performing areas should expect to see the most significant changes.
“The hotter the submarket, the more likely that it will be aggressively looked at,” he said.
Of the 12 largest metropolitan areas in the country, DFW lands at No. 1 in terms of job growth, Maso said. Vacancy rates at existing office buildings are decreasing and the pipeline of new projects is growing. These factors, combined with a shortage of materials driving up the cost of construction, are leading appraisal districts to more aggressively assess values.
“Appraisal districts are using valuations [on new buildings] as an indicator for the Class-A older buildings,” Maso said. “As those leases renew, they’re coming up at a higher level.”
Building owners are passing the buck of rising property taxes to tenants, especially in triple-net lease scenarios, Maso said. According to the most recent Transwestern report, rent growth for Class-A office space reached 5% in Q1, the first time growth rates have exceeded the pre-pandemic average.
“The landlords are going to pass that [cost] on every time,” Maso said.
Each appraisal district values properties a bit differently, which means there may be some discrepancies across counties, Maso said. Properties in Collin and Denton counties, which experienced high levels of growth in 2021, should expect to see the most drastic changes in value, he added.
Cities and school districts use preliminary appraisals to help draft their budgets and determine tax rates for the upcoming fiscal year. Due to a 2019 state law, which limits funding for municipalities by requiring voters to sign off on property tax revenue growth exceeding 3.5%, some cities may be forced to lower rates in order to stay within those bounds.
“The cities will have the choice to either lower property tax if it’s past that threshold or have an election,” said Maso, who is also the former mayor of Frisco. “Most of them will go to the max [amount] they can, but [tax ratification elections] are tough to do in these times, I don’t expect to see a lot of any of those.”
Ryan has noticed large divides between the value assigned by the appraisal district versus where the property’s value ends up post-protest, Maso said. He encouraged property owners to carefully consider their valuation once they receive their notices beginning April 15.
“We’re seeing a lot of unevenness, and without the technical background and technical experience in each taxing jurisdiction, it’s hard to argue those,” he said. “The appraisal districts are separate, and they come up with vastly separate valuations for like properties.”