Industrial Owners In Dallas See Huge Value Increases, Warn Of Potential Shockwaves

“Dude, are they living under a rock?” was one of the more G-rated texts local property tax consultant Ryan Chismark received after the Dallas Central Appraisal District released its estimates for industrial values the morning of April 15.

After several years of juggernaut performance, the appraisal district is demanding industrial owners pay the piper. Despite the sector’s success, the timing of the decision has elicited strong reactions among owners struggling to reconcile double-digit increases with the loss of income they have endured over the last 18 months.

With initial value estimates showing increases of between 53% and 70% in just one year, consultants are preparing for a heated protest and litigation season, the outcome of which could put cash-strapped tenants at greater risk of buckling under the pressure.

“We’ve never seen more than 25% increases on initial values,” KE Andrews Director Tony Trahan said. “This is a complete shock to the system for all property owners and tenants — it came out of left field.” 

DCAD’s decision to spike values is questionable at best, harmful at worst, owners and consultants told Bisnow. The increases are a poor reflection of the state of the market, which has been marked by low transaction volumes, sluggish leasing activity and rising vacancies since the Federal Reserve began raising interest rates in mid-2022.

It’s the perfect storm, consultants said, and not since the Global Financial Crisis have owners been as desperate to protect the profitability of assets by mitigating their property tax burden.

“It’s just another hit to the businesses’ bottom line,” Ranger Tax Consulting partner Alex Pace said. “It’s going to affect how much money they can put back into their company to grow, how much they can pay their employees — everything.”

DCAD didn't respond to Bisnow’s requests for comment, but consultants said the district is trying to “mark to market” industrial properties all in one push, having spent the past few years undervaluing the asset type despite its extraordinary growth.

“The prior year increases were nominal, and this an effort to play catch-up,” said Jon Redmond, manager of the U.S. real property tax division at Altus Group.

Several factors have supported DFW’s staying power as one of the nation’s top industrial markets, including the rise of e-commerce, rapid in-migration and the return of manufacturing from overseas.

The regional under-construction pipeline remained the most active in the nation at the end of 2023 at 41.7M SF. Asking rents were up 12.5% despite new deliveries pushing the vacancy rate to 9.7%, according to Savills.

DCAD looks at comparable transactions when determining values, and despite deal volume falling 64% across the board last year, the few buildings that did sell went for top dollar, said Dee Estep, a principal in CLA Dallas’ real estate group.

Two industrial properties in South Dallas were among the Metroplex’s biggest sales in 2023, according to CBRE data. In December, Florida-based Basis Industrial paid more than $81M for two warehouse properties in Fort Worth, The Dallas Morning News reported.

“We are seeing properties being sold at a very high premium for the right location and for the right product,” Estep said. “They weigh heavier on trades than they do on market conditions. They always have.”

From the property owner’s point of view, the method is inherently flawed. Not only are appraisal districts relying on year-old data, but their calculus fails to take into account multiple extraneous factors that dictate a building’s market value, Meritax Advisors’ Chismark said.

“They’re looking primarily at cap rates from more than a year ago to justify values today, which is simply not an acceptable metric,” Chismark said. “A number of owners would say that it’s extremely disheartening to see values go up knowing what’s happened in the cap rate environment in almost every asset class across the state of Texas.”

CanTex Capital, a Dallas-based owner of Class-B industrial, was hit particularly hard by DCAD’s estimates. One of its properties is estimated to be 200% more valuable today than it was a year ago, an increase that would have been unheard of in prior years and makes little sense in a down cycle, CEO Romit Cheema said.

“The market has slowed down, leasing has slowed down,” he said. “It feels like they just applied [values] arbitrarily and said, ‘Let’s pump up wherever we can and see what sticks.’” 

Another unique factor that could explain the spikes is a changing of the guard at DCAD. Molly Vaughan Wolff was promoted to commercial industrial supervisor in April 2023, and consultants familiar with her work said her method tends to be slightly more aggressive.

DCAD didn't respond to Bisnow’s request to speak with Wolff, but Trahan and Chismark said the district's strategy may be to lean more heavily on the success of industrial to offset losses in other asset types.

“The appraisal district really didn’t have many levers to pull,” Chismark said. “The one asset class they could really pick on if they wanted to was industrial, and boy, did they.”

The median percent change for apartments was around 20%, while office values are up 8%, DCAD estimates show. Retail is up about 10%, while hotels are up 21%.

“Industrial is probably the most palatable product type for this to happen to from an ownership perspective,” Trahan said. “If this was apartments and they were up 65%, it would be Armageddon.” 

The vast majority of industrial leases are structured on a triple-net basis, meaning tenants pay rent and are also responsible for their share of expenses, including property taxes, building insurance, maintenance and utilities.

Owners will ultimately be spared higher property taxes, but that doesn’t mean they’re off the hook, Cheema said. The majority of CanTex’s tenant base is composed of smaller mom-and-pop businesses, which in a softened economy may not be able to withstand yet another hit to their bottom line.

Put simply, the increases compromise an owner’s leasing ability, Cheema said.

“Obviously, we want our tenants to be successful and thriving and growing,” he said. “We also want tenants to be coming to the city of Dallas and bringing their business here, and when our triple-net calculation is higher, that impacts the tenant’s decision to come to specific buildings or to Dallas County in general.”

Trahan also said DCAD might shoot itself in the foot by trying to capture several years’ worth of value growth in one fell swoop. Not only could the decision inadvertently cause the migration of tenants, but it may also discourage new development.

“You’re going to run people out of town,” Trahan said.

DCAD may also be trying to build in some wiggle room knowing values will be lowered through the protest and litigation process. But property taxes will undoubtedly go up to some degree, a certainty that some tenants will be able to stomach better than others.

“For tenants that have leases coming up, it will incentivize them to shop,” Pace said. “But the majority will have to figure out a way to make this work within their business.”