By Amish Gupta – COO, RETC
In 2012, Dallas County raised values by an average of 4.2 percent on all commercial parcels excluding land. On the bright side, this is a good indication that property values in the area are generally trending upward. On the downside, it also means higher property taxes and thus lower net operating income.
2012 values are driven by the prior year’s financial results. 2011 market occupancies and rental rates had a direct impact on the 2012 assessed values. Not surprisingly, the two sectors that had the highest revenue growths, hospitality and multifamily, also drove the growth in Dallas County assessed values.
According to the Texas Hotel Performance Factbook, total revenue for hotels increased by 13.2 percent from 2010 to 2011. Average Daily Rate (ADR) grew by 3 percent, and occupancy increased from 55 percent to 60 percent. As a result of these numbers, Dallas County grew values on average by 17.3 percent in 2012. And although hotels only represent a small fraction of the overall assessed values in Dallas County, they accounted for almost 17 percent of the total growth in value for commercial real estate values.
Multifamily accounts for 20 percent of the total commercial asset base in Dallas County, but accounted for almost 40 percent of the total growth in assessed value. Not only were the results driven by increases in revenue, but also low cap rates. According to Reis Inc., vacancy dropped from 8.2 percent to 6.2 percent in 2011, and effective rents increased by 3 percent. Additionally, trades in the market have demonstrated the willingness to purchase at lower yields. According to Real Capital Analytics, the average cap rate for all classes of multifamily trades was at 6.61 percent in Q4 of 2011. All of this led to an average increase in assessed values of 9.2 percent.
Although the values did not increase as dramatically for office or industrial, they did see slight increases at 4.6 percent and 1.9 percent respectively. Both are reflective of the slight increases in occupancies and effective rents. The limited new supply has helped start tilting market dynamics toward owners versus renters (although there is still much vacant supply available).
Retail saw similar limited growths in occupancy and effective rents according to Reis with vacancy dropping 0.7 percent and effective rents increasing by $0.10 in 2011. However, Dallas County chose to keep values constant in 2012 with a 0.1 percent growth in assessed values.
In 2013, we anticipate Dallas County to continue to be aggressive overall. Multifamily and hospitality should see continued growth in assessed value similar to what was experienced in 2012. However, Dallas County has the opportunity to increase values more aggressively in the other commercial sectors. Much of the growth that did occur in 2012 with office and retail was in certain submarkets.
Assessed values for a large percentage of assets have remained constant for two-to-three years. It is possible that those properties could see large increases in 2013 to “make up” for the lack of growth in the prior years.
Generally speaking, if a property you own has seen an increase in NOI, you can probably anticipate some type of commensurate increase in property taxes. However, take notice that if your value has not changed in a few years, Dallas County will likely take another look at it in 2013. They likely will be at least as aggressive in 2013 as they were in 2012. Additionally, they do have reason to be even more aggressive in certain sectors and submarkets due to market trends.
Amish Gupta is chief operating officer of Real Estate Tax Consultants Group.