What should buyers, sellers and/or developers keep their eyes on as they head into 2023?
Given the changed economic landscape over the past few years, owners of office buildings must keep an eye on their real estate tax burden. The COVID-19 pandemic, plus increased flexibility for employees to work remotely, has produced the equivalent of “four horsemen of the apocalypse” factors for the basis of valuation of office buildings in property tax appeals.
First, the office rental market has been continually stagnant or declining. As older leases expire, which were initially negotiated years ago in a rising rental market, many tenants that choose to renew their existing space are doing so at flat or declining rates due to weakened market demand.
Second, owners are facing the problem of an increased amount of vacant space as companies continue to downsize, move out of state, or simply expand their remote workforce considerably decreasing the need for physical space.
Third, expenses are continuing to rise. In addition to normal inflationary factors, there are increased costs for utilities, enhanced cleaning protocols and upgrades to air filtration systems due to COVID-19 concerns.
Fourth, overall capitalization rates have increased with high interest rates on the mortgage side and greater risk on the equity side. Higher capitalization rates produce lower appraised values.
For property tax purposes, buildings must be valued for the upcoming year according to their current use and condition. The large shift in lease renewal rates, occupancy percentages, expenses and capitalization rates have or will result in a drop in market values of 10% – 30% over pre-pandemic market values. Consequently, property owners must be vigilant in challenging assessments to ensure current taxes are based on this new valuation reality — which can make the difference of several dollars per square foot in taxes.
Click here to read Long Island Business News‘ December 16, 2022 Special Advertising Supplement.