Homeowners will be paying more in property taxes while property taxes are declining for commercial property owners. This atypical change is caused by complex issues related to COVID that will not be fully understood for three to five years. The market value of houses and commercial property typically rise and fall in tandem. Record demand for houses and a shrinking supply are driving home prices to record levels. Meanwhile, commercial values are being reduced by lower demand, structural changes in usage and higher interest rates.
Texas home owners will generally see a 10 to 15% increase in property taxes in 2021 while commercial property owners will pay 5 to 10% less, compared to 2020. The net result of higher property taxes for home owners and lower property taxes for commercial owners is home owners paying a higher portion of Texas property taxes.
Home prices in Texas and across the country have been setting sequential records for volume of sales and sales prices since Summer 2020. Home prices for January 2021 are up 10 to 15% for most metro areas. Manhattan and downtown San Francisco are notable exceptions, due to population fleeing the densest locations and moving to suburbs and second and third tier cities. For example, home prices in Boise, Idaho are up 27% over the last year. The median home price in Boise, Idaho is $437,800, well above the average of $275,900 in Houston. The February 2021 Houston median home prices is up 12.6% from February 2020.
Homes available for sale from builders and current owners have fallen steadily over the last year. To date, higher interest rates have not dampened the demand for houses. The inventory of homes for sale in Houston has fallen more than 50% in the last 12 months. The inventory was 3.3 months in February 2020 and was 1.6 months in February 2021. This is a record low level of inventory for Houston. However, Houston offers a broad selection compared to Austin, where the inventory of homes for sale has fallen to 0.6 months; two weeks of homes for sale.
While home prices are soaring to record levels, commercial property owners are being pummeled by higher interest rates, lower demand and structural changes in usage. Consider the following issues impacting commercial property owners:
- Hotel revenue down 50% versus pre-COVID level.
- Uncertainty over business travel returning for hotels.
- Retailers have seen more sales moved online. In many cases, the shift from sales in brick and mortar to online is permanent.
- Record levels of retailers filing for bankruptcy reducing tenants for retail property.
- Malls closed for months due to COVID.
- Uncertainty over office space usage as tech, finance and service companies announce plans to reduce their office space.
- Apartment rent collections down due to prohibitions on evictions, now through June 2021. Most current tenants will not be able to catch up on six to twelve months of back rent.
Warehouses are the sole commercial property type not pounded by COVID.
The net effect for most commercial property owners include: 1) lower revenue, 2) flat to higher expenses, and 3) uncertainty regarding value due to limited sales. It may take two to five years for the long-term ramifications of structural changes in habits and commercial real estate demand to be understood. It is clear that commercial property values are down. It is not clear how much and for how long.
Hotels have suffered the worst. With revenue down 50%, most hotels have zero or negative net income. Industry forecasts project a three- to five-year recovery. While leisure travel is improving, business travel is dead. Large in-person meetings are not occurring. Valuing an income property with zero net income is complex. The value conclusion is highly dependent on the pace of recovery and the risk premium required by investors.
Determining market value is difficult. Zero net income does not mean zero value. However, it does indicate a sharp reduction in value; perhaps 50%. Few to no sales limit price discovery. While many hotel loans are delinquent, lenders to date have not foreclosed. However, hotel owners who are six to twelve months behind on mortgage payments face difficult decisions as revenue recovers. There is no forbearance agreement in most cases, meaning the owners are at the mercy of the lender.
Retail, office and apartments have also incurred hardship, but at a less severe level.
Commercial property owners will be appealing property taxes more intensely than in past years. In the past, commercial property owners were mostly seeking to abate the pace of assessment increases. This year, commercial property owners will be seeking substantial reductions below last year’s value. Evidence will support assessments well below the 2020 level.
Most commercial property owners will appeal property taxes in 2021 while most home owners will not. The result will be commercial property taxes below the 2020 level and residential property taxes 10 to 15% above the 2020 level.
It is no clear how long commercial property values will decline and how long houses will set new records. There is a reasonable chance these trends will continue into 2022 and 2023, causing home owners to pay a larger portion of property taxes. It is almost certain that commercial property taxes will be reduced in 2021 while property taxes for home owners rise 10 to 15%.
Home owners can limit the shift by confirming they have a homestead exemption and appealing their assessed value. Five of six home owners who appealed in 2019 received a reduction, averaging $500, according to the Texas Comptroller. Home owners who appeal have a high likelihood of success in reducing their property taxes.
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