Depreciating Commercial Assets Spell Tax Dip

Commercial Construction
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Plummeting values across North Texas’ commercial real estate sector could spell trouble for the jurisdictions depending on the collection of property taxes from those entities.

Policy firming by the Federal Reserve and declining demand for office space are just some of the factors contributing to the sharp decline in the value of commercial office buildings in 2023. With falling prices persisting into 2024, many investors have been forced to accept hefty losses when offloading their office property.

For instance, a pending bankruptcy sale values the Gateway Tower at 8111 LBJ Freeway at $12.5 million despite a tax appraisal of $20.2 million. Additionally, in 2023, the CityLine office tower complex in Richardson sold for about $124 million less than its appraised property tax value.

Cities in which commercial real estate values are depreciating the most will be the municipalities hardest hit by the overall drop in local property tax payments, suggested Susan Gwin Burks, senior vice president with Dallas-based commercial property firm Avison Young.

“My opinion is that it could greatly impact the tax revenues to the cities where the assets are located,” said Burks, per The Dallas Morning News. “As we all know, a great percentage of owners protest their taxes every year due to loss of revenue or vacancy, market dynamics, etc., and typically get relief if the evidence is there.”

“With the deeply diminished value comparables they will be able to use as evidence to protest their taxes, it will probably make a significant difference,” she added.

Despite concerns over the commercial office market in DFW, less than 1% of transactions in 2023 were considered “distressed,” according to Alexis Maltin, vice president of research with MSCI. While commercial real estate prices have “come down from their record levels,” distressed properties only represented a “very minimal part of the market in Dallas,” she said, per DMN.

“Offices, which is where there is noted pain, have seen prices come down 27% from where we see that they had peaked early in 2022. Across other asset classes, prices have not declined, or declines have been fairly minimal,” she explained.

Maltin says the “valuation for specific assets and/or specific asset classes may be falling,” but as more assets come online, they will hit the market with “a higher taxable value than whatever existed previously in their place.”

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