Texas Commercial Property Tax Consultants

The end of the Appraisal Review Board (ARB) season is upon us, with potential litigation and arbitration looming. Let Texas Commercial Property Tax Consultants (TCPTC) handle that next step. One of your most important rights as a taxpayer is your right to protest the ARB decision. You may protest if you disagree with the ARB value or any of their actions concerning your property. Upon receiving your certified ARB final notice of value from the local District, you have 60 days to file either litigation or arbitration. The arbitration process applies to properties $5M (non-homestead) and less in value. If successful, there is a non-refundable $50 arbitrator fee, and the remaining fee will be returned to the property owner. TCPTC has multiple regional 3rd party vendors that we work with directly to achieve the lowest value possible. Litigation has unfortunately become the norm in Texas for most commercial properties, in the property owners’ never-ending pursuit for the lowest taxable value. For property owners, Texas fortunately utilizes Uniform and Equal Appraisal. This advantageous methodology takes a sampling of the subject property’s most direct comparables located throughout the city while making subjective quantitative adjustments for the size, age and quality, among other factors. U/E Appraisal directly reduces the impact of leaked market transactions. TCPTC has saved their clients over $2.5M in taxes throughout the 2024 ARB process. The arbitration process has associated filing fees that follow in the below chart.

Mortgage rates are currently at their lowest averages in over a year, with the 30-year fixed-rate mortgage at 6.35% and the 15-year fixed-rate mortgage at 5.47% as of early September. Rates have been stable for five weeks with recent daily fluctuations minimal. Economists expect the Federal Reserve to lower interest rates later this month, further reducing borrowing costs. However, significant drops in mortgage rates are not anticipated immediately. While home sales remain sluggish, recent rate declines have led to increased refinancing activity among homeowners seeking to lower their monthly payments.

Over the past two years, the U.S. multifamily market has seen unprecedented levels of new apartment construction, outpacing demand and raising the national vacancy rate from a low of 4.8% in 2021 to 7.9% in mid-2023. Despite the addition of 1.5 million rental units, only 820,000 absorbed, the market is not overly saturated compared to pre-pandemic levels. To return to a 6.6% vacancy rate seen in late 2019, approximately 280,000 units need to be absorbed. While markets like Austin and Dallas-Fort Worth have notable excess supply, other cities like Chicago, Orange County, and San Jose have managed their supply more effectively, with vacancy rates below pre-pandemic levels due to more conservative construction practices.

Houston has experienced shorter periods of transaction downturns compared to the national average, and current trends suggest a recovery. Following seven consecutive quarters of declining transaction volume through mid-2023, activity has recently started to increase. In early 2024, sales across various sectors in Houston totaled approximately $1.6 billion, a 52% increase from the previous year. The financing environment is improving with the return of bridge money and new debt funds, while multifamily sales volume, a leading indicator, has been rising. Anticipation is high for a boost in activity in the fourth quarter, potentially driven by expected interest rate cuts and an increase in distressed sales.

Texas state officials state that they are dedicated to tackling housing shortages and affordability but recognize there are no easy fixes. The Texas Comptroller’s Housing Affordability Challenge report suggests that while policies promoting affordable homeownership and reducing development restrictions could ease the housing crisis, zoning laws might inadvertently raise home prices and rents. The report also highlights challenges such as a lack of supply, the influence of institutional investors, high property taxes, mortgage rates, and insurance costs as barriers to affordability. Despite Texas leading the nation in building permits, the state faces a significant shortfall, with a need for over 300,000 new homes to meet demand. Median home prices have surged, and while easing zoning might help in some areas, it is not a universal solution. The state is committed to working with lawmakers to address these complex issues and improve housing affordability.

Job growth in Houston is slowing, with the city losing 13,100 jobs in the first seven months of the year, compared to the historical average addition of around 22,000 jobs annually. The primary losses have been in the trade, transportation, utilities, and government sectors. However, there are positive signs, such as major industrial leases, indicating potential for recovery. Additionally, the leisure, hospitality, and construction sectors are showing job gains, with increased hiring in food services and retail driven by post-pandemic consumer behavior and food delivery trends.

Texas lawmakers used unprecedented state revenues to propose significant reductions in school property taxes, aiming to ease the burden on property owners. These changes were tackled over multiple legislative sessions in 2023 and included increased exemptions, reduced school district tax rates, and limitations on appraised values for certain properties. In 2021, property taxes accounted for over half of the total tax revenue for local and state governments, though this dropped slightly in 2022. Texas voters approved Proposition 4 in November, which significantly boosts the residence homestead exemption from $40,000 to $100,000, compresses school district tax rates further, and introduces a three-year limit on property value increases. Texas does not have a state property tax, relying on local governments to levy and collect property taxes, which fund essential services and public education. In 2022, school districts levied over 55% of local property taxes. The state’s property tax system is designed to balance local funding with state contributions, using mechanisms like recapture to ensure equitable funding across districts. Texas property taxes are high due to the state's lack of income tax, with effective rates ranking sixth highest in the U.S. Despite this, the overall tax burden remains relatively low compared to other states due to the absence of a personal income tax. Recent legislation has incrementally increased exemptions and adjusted tax rates to provide relief, culminating in Proposition 4. This legislation is expected to improve Texas's standing regarding property tax burdens, potentially saving homeowners around $1,000 annually based on a typical $350,000 home. The reduction in property taxes comes at a crucial time, helping Texans manage inflation, rising interest rates, and increased housing costs.

In the first half of 2024, Houston saw only 75 apartment property sales, the slowest since early 2010. High borrowing costs and a challenging financing environment are contributing factors. Additionally, a record high of new apartment supply last year has pushed the vacancy rate to 11.1%, the highest in 20 years. Rent growth has sharply slowed to 0.4% annually, well below the 1.6% average from 2015 to 2019. This slowdown, along with other factors, is impacting asset underwriting. Private buyers, who are less reliant on debt, have increased their market share, making up nearly two-thirds of buyers compared to a long-term average of 55%. Meanwhile, rising treasury rates and borrowing costs have increased capitalization rates. Large, high-quality properties that once had cap rates of 2.5% to 3.5% are now in the high 4% to low 5% range. Mid-quality properties are trading in the mid to high 5%, and lower-quality properties are pushing above 6%. Despite reduced activity from institutional investors, they still pursue newer properties in growing suburbs or affluent urban areas. For instance, Westworth Capital purchased The Cape, a 4-star property in Tomball, for $32 million at a 6.2% cap rate. Looking ahead, around $575 million in multifamily loans will mature in 2024 and $935 million in 2025. Current owners may struggle to refinance due to high interest rates, leading to a potential increase in distressed sales.

In the first half of 2024, Houston’s office leasing activity reached 8.8 million square feet, just below the 9.1 million square feet from the same period last year but still above the 7 million square feet average from 2015 to 2019. This figure may increase as CoStar updates with more recent deals. The total leasing volume was boosted by several large transactions, with six leases over 100,000 square feet signed in the first half of 2024, compared to eight in the same period last year. Noteworthy leases include Camden Property Trust’s 104,000-square-foot deal at Williams Tower and Noble Corp.'s 110,000-square-foot lease at CityWestPlace, both in renovated buildings. Office building performance in Houston varies by quality and location. High-quality, five-star buildings are the only ones showing consistent positive occupancy trends. Older office properties are struggling to attract tenants as businesses focus on creating appealing work environments and reducing excess space in response to changing work habits and post-pandemic cost-cutting.

At the end of Q2 this year, Houston and New York are showing the highest strain in commercial mortgage-backed securities (CMBS) for market-rate multifamily properties. These two cities account for nearly half of the troubled CMBS loans in the U.S. for such properties. In these markets, the troubled CMBS loans are concentrated in areas with declining renter demand. For instance, in smaller markets like Cleveland, one large multifamily property heavily influences the overall delinquency rate. CMBS, often used by borrowers without the net worth for traditional multifamily financing, backs less than 5% of the U.S. multifamily market. This limited appeal is due to strict loan terms and lack of flexibility compared to traditional financing, leading to more trouble when issues arise. Nationwide, troubled CMBS loans represent just 0.07% of the rental apartment inventory. Houston’s rate of 0.6% is nearly nine times the national average, while New York’s rate of 0.2% is three times the average. Houston’s multifamily market, historically attractive to investors due to its aging stock, has seen rent growth slow from a high of 8.7% in 2021-2022 to below 1% in recent quarters. In contrast, New York investors focus on stable, high-demand areas, but their legacy properties face challenges due to rent control and high costs. Overall, CMBS loans in markets with older apartment stock, like Houston and New York, struggle due to limited secondary financing options and rent control issues, impacting the financial stability of these properties.