Commercial Property Values Still Rose In Houston During The Pandemic

Commercial property values in Houston have been rising by double-digit percentages for several years. That upward trend held true throughout the intensity of the coronavirus pandemic. Commercial property values in Houston rose across nearly every asset class at the beginning of 2021.

The majority of commercial real estate owners in Harris County protest their appraisals each year to try and curb rising property taxes. But after last year’s economic roller coaster, tax experts say the number of people looking to appeal their valuations is on the rise.

Despite the economic disruption caused by the pandemic, commercial property values rose by 9.3% on average at the beginning of 2021, according to Harris County Appraisal District data covering the 107,347 commercial property parcels in the county.

Certain types of real estate received a larger bump than others. Warehouse property values saw the biggest increase, 11.8%. Next came land values at 10.4%, followed by retail at 10.3%, multifamily at 10.1% and office at 6.6%. Only hotel property values fell, declining by an average of 12.5%, according to HCAD data. 

The increase in property values caught some by surprise, as many people expected the pandemic to cause a decrease in property values, according to Bettencourt Tax Advisors CEO Paul Bettencourt.

Property values rarely dip below the prior year’s valuation. The values at the beginning of 2020, coupled with nearly a full quarter of normalcy before the lockdown period was enacted at the end of last March, all contributed to higher values.

The industrial sector thrived because of soaring demand for consumer goods, boosting the value of properties used by e-commerce and third-party logistics firms. Multifamily also did well, reflecting the reality that even in a time of crisis, people still need a place to live.

Bettencourt noted that although office buildings remained largely void of people during 2020, businesses were still able to operate remotely and thus pay rent.

On the other hand, many retailers struggled in 2020, and those assets still saw their valuations rise on average. 

A widely used method for commercial real estate appraisals is the market approach, which uses recent market transaction data or sales prices for similar assets to arrive at a value. One reason for rising property values in 2020 is that fewer distressed properties have appeared on the market than originally expected. Federal relief packages, loan forbearances and general liquidity in the market have all helped prevent a much-anticipated tsunami of debt.

Deloitte Real Estate Accounting and Auditing Partner Renea Burns noted that the impact of the pandemic on the commercial real estate sector has been more similar to the relatively short 2001 recession than the 2008 recession, which had additional distressed assets since it was also impacted by access to liquidity.

However, Bettencourt said that plenty of out-of-state investors have been buying Houston commercial real estate over the past year, seeking new places to put their money. That has helped to push prices up across different asset classes in the region.

“Between Covid and energy, you would expect that there would be a tax roll reduction in Harris County. But that does not appear to be the case, primarily due to a lot of out-state money coming in and buying up commercial and residential real estate,” Bettencourt said.

Protesting HCAD’s property valuations is an annual ritual for the majority of commercial property owners in Houston. On average, between 85% and 90% of all commercial valuations in the county are protested each year, HCAD Chief Communications Officer Jack Barnett told Bisnow. There is a clear driver for the steady appeals, as rising values mean one thing: higher property taxes.

Appeals could have more basis than usual. The typical method of appraising based on comparable sales didn't always make sense, as 2020 was an unusual year for many property owners and their balance sheets. Supplementary information showing pandemic-related losses could help reduce some valuations.

“This type of inflection year is really a must-year to protest, because if you're in the overheated section, you want to be able to pull that value down. And if you're in the underheated section, you want to push it down,” Bettencourt said.

Burns said the pandemic and shifting customer demands have already led to a noticeable uptick in the number of protests and appeals this year, particularly for the harder-hit hotel and retail sectors. 

“For income-producing properties, such as hotels, we’ve seen a significant drop in net operating income. This has led to a strong case for reductions in value for property owners,” Burns said. “These factors, along with an already changing retail landscape before the pandemic, have altered how stores and their retail footprint are being used.” 

Many jurisdictions in Texas opted to introduce reductions in value for specific property types to mitigate anticipated drops in value in 2021, according to Burns. Others have simply rolled over values from prior years. 

“We tend to see many different approaches to how tax assessors and appraisers are handling this issue for cities and counties,” Burns said.

The deadline for commercial property owners to file a tax protest in Harris County was May 15, and in theory, HCAD should issue decisions by August. However, those timelines have been known to stretch out as far as Thanksgiving, and the increased volume of appeals this year is placing even more time pressure on appraisal districts.

“To combat this, we’ve noticed additional avenues for property owners to protest their values through phone hearings and informal discussions. These avenues are especially prominent in the more rural areas of Texas,” Burns said.

While many of the appeals will likely be successful, the upward trend in property values is anticipated to continue. Bettencourt said that he expects the speed and strength of the national economic recovery, coupled with rising inflationary pressures, to boost commercial property values in 2022.

“Even going through a double whammy like last year, I expect the tax rolls to be higher, really across the board, in 2021 than they were in [2020]. Even with people protesting and getting reductions,” Bettencourt said.