Pandemic Ad Valorem:
The Dramatic Impact that
The COVID-19 pandemic is having a dramatic impact on property tax assessment nationwide. This is an evolving dilemma, not only by property classification, but also by industry and tenant type. Every real estate sector is experiencing a negative impact.
Those sectors in the greatest freefall are hospitality, retail, and office. All new construction coming online during this pandemic will face valuation issues.
Luxury hotels at destination resorts are being hit the hardest. Just getting to these properties during the lock-down is next to impossible. Entertainment resorts and golf-related facilities, which were already fiscally impacted, will likely be further devastated. This will also impact industry-specific personal property assets like gaming machines.
Some markets are anticipated to feel long-term deterioration with the early shutdowns. San Francisco hotel occupancy fell from the beginning to middle March from 81% to 17%; New York City went from 80% to 17%; New Orleans dropped from 76% to 20%, all with slashed average daily rates.
This industry has the shortest leases and thus is experiencing the worst effect from the pandemic. No other asset type will need greater assistance in assessment valuation the next couple of years. Supportive industries such as the airlines and travel are crushed by this event and will continue to be so until there is a cure. Thus, hospitality will bear the brunt of this pandemic for the unforeseen future.
"No other asset type will need greater assistance in assessment valuation the next couple of years."
Declining rents and rising vacancies make for a volatile situation in the retail sector. The fundamentals reflect a decline of 4% in rents in 2020 and an additional 6.4% in 2021.
Retail was already struggling with department store vacancies and the race to find alternative uses for dying malls. Neighborhood and community center vacancies peaked in Q3 of 2011. As of year-end 2019, the nationwide retail vacancy rate was 10.2%.
The longer the shutdown continues, the worse the deterioration will be for on-site retail. If protracted too long, freestanding locations will have difficulty surviving. Retail, like hospitality, is in a time crunch to get back online as soon as possible to avoid a severe recession, or worse. Retail will continue to be an industry to monitor, in order to ensure stores are correctly assessed.
"Retail will continue to be an industry to monitor, in order to ensure stores are correctly assessed."
Office occupancy fundamentals have languished across the nation. This is not the case in highly desirable cities such as New York, Boston, San Francisco, and Seattle which experienced exponential growth in values, rents, and EBITDA (earnings before interest, taxes, depreciation, and amortization).
There are numerous concerns from owners as dynamics shift to a more portable tenant. WeWork has seen this as workers use various alternatives to traditional offices, everything from coffee shops to homes. This could be a precursor to what office buildings may experience via COVID-19. Organizations adapting to a mobile environment could rethink maintaining their costly office footprint.
Apartments had the greatest growth of all real estate sectors over the past decade. However, multi-residential will not go unscathed from this virus. Vacancies are projected to rise to 6.6% by year-end 2020, according to Moody’s Analytics. A slowing of groundbreaking projects will help moderate occupancy to some degree once those already in development hit the market.
It is projected that markets like New York City and San Francisco will be more resistant to decline and able to recover quicker due to historical high demand and rent control. If there is a decline in densely populated cities, a push outward to suburban locations and secondary, or even tertiary markets can be expected. Couple this with the potential culture change of floor space needed for office employees and there could be a fracture in much of the newly developed areas of high-rise living in major metropolitan areas. The offset could be more open living spaces, as working remote becomes a more viable option.
However, there is a concern for dense living as the spread appears to be more rampant in those high-rise dwellings with shared corridors and access points. Finally, there is a thought that there might be a shift from urban to suburban which could adversely affect high density projects and feed the open space living.
The industrial market will experience a contraction as supply growth exceeds demand. Vacancies nationwide are expected to hit over 13% in 2020 and continue to 14% in 2021. During this time, effective rents should decline by approximately 6%. Industrial will be spotty with as manufacturing slows. However, it could come out stronger due to:
Please note that we are seeing some leasing activity of industrial space during this time by web-based retailers and logistic firms.
What do changes from COVID-19 mean for a post recovery market? Even with a bounce back from the virus and a strong Q4 2020, year-over-year assessments could easily represent double-digit net losses in value for many properties.
Tax assessments are determined by the history of income streams received. The 2020 income expectations will not be met and possibly, neither will 2021. In valuing real estate for tax purposes, entities must no longer consider what was -- but what lies ahead.
If you have questions about your property taxes or want another set of eyes to review your assessment, then be sure to contact us today.