Houston Braces for Growing Commercial Tax Revenue Hits

This episode of the Commercial Real Estate Daily podcast is brought to you by CRE Launch Pro. If you’re looking to take your investing skills to the next level with online courses, group coaching calls, and a community of other investors, head on over to www.CreLaunchPro.com

Episode Transcript:

A conspicuous decline in commercial asset values has dealt a financial blow to Houston's municipal coffers over the past two fiscal years, reveals a sobering new report from the city's finance department. However, the newly disclosed figures likely represent just the tip of the proverbial iceberg.

The assessed worth of Houston's total commercial property portfolio plunged roughly $1.2 billion between 2021 and 2022, per the city's Annual Financial Statement published this week, initially reported by the Houston Chronicle.

The report indicates commercial property valuations amounted to $89.3 billion in the 2022 fiscal year ending last June, markedly below the $90.5 billion logged in 2021. While the year-over-year dip seems relatively modest, it pales in comparison to the more severe plunge from 2020, when assessed commercial values hovered at $98 billion. This represents over $170 million in evaporated tax revenues for the city, according to the Chronicle's estimates.

"The situation facing Houston's commercial real estate scene is extremely troubling," explained Rice University Public Policy Fellow John Smith in an interview. "And this is likely not yet rock bottom."

Smith emphasized Houston's published property values essentially reflect market conditions from nearly two years prior, meaning 2022's figures mirrored 2020's landscape. Given the ongoing tenant exodus from offices and the spate of recent distressed asset sales at nearly half their former pricing, he anticipates values still have further to fall.

"Things have unquestionably deteriorated since 2020," Smith said. "There's been a surge of office buildings trading at 30 to 35 percent discounts to prior sales prices. And while the pain isn't universal, that scale of value erosion would be catastrophic from a budgetary and economic perspective if it materializes more broadly."

Houston's financial statement shows a modest $24 million bump in actual property tax collections last year, rising from $2.46 billion in 2021 to $2.48 billion in 2022. However, it does not parse residential versus commercial collections. It does note the "negligible" gains stemmed predominantly from the residential arena.

"The housing market has clearly eclipsed commercial real estate in performance since the advent of COVID-19," the report reads.

Houston Chief Financial Officer Tammy Young informed the City Council last week she projects annual commercial property tax takings could plunge up to $255 million below 2020's sums due to flagging values, as per the Chronicle.

The statement also shows income from "other taxes" nosedived nearly 36% year-over-year, attributing this to waning deed tax receipts resulting from dampened sales volumes.

"The decline in deed changes reflects reduced transactions and financing in Houston's real estate landscape, shaped by the rising interest rate climate," the report says. "Additionally, the sale price and volume of commercial deals dropped markedly from pre-pandemic benchmarks, stemming from elevated vacancy and evaporated office demand."

While Houston has already amassed taxes for 2022, owners are only halfway through the appeals timeline, emphasized consultants at property tax advisory firm Popp Hutcheson.

This means the city could still be compelled to furnish refunds to owners securing reductions in the final appeals stage, as happens annually, they said. And amidst this volatile period for commercial values, total refund sums escalate each year.

Meanwhile, owners now eye the new tax assessments for the upcoming fiscal year due for release soon, kicking off a process likely to spur heightened contests this cycle.

This is Tyler Cauble, Signing off