Hot Industrial Market Cooling? Property Tax Implications Abound
The precipitous rise in interest rates in the past two years has certainly impacted deal flow in most classes of commercial real estate, with the already weakened office market bearing the brunt of the harm due to decreased demand, maturing leases and maturing debt. More info regarding asset repricing is available in this article in The Counselors of Real Estate’s® Real Estate Issues magazine: “Asset Repricing — Are We There Yet?” And while some have suggested that the abundant supply of office properties should be considered for conversion into multi-family housing to address a nationwide deficit of supply of housing, these conversions are predominantly difficult, expensive and complicated, meaning that few are feasible and will ultimately occur. This issue was the focus of a webinar in which MROD’s Anthony DellaPelle was a panelist: “Office Conversons: A Means to an End?
The impacts of rising costs of debt, expenses and lower investment yields has perhaps been felt the least by the industrial sector, which remains a strong performer. In particular, demands for warehouse space across most classes and in most regions remains high, and asset pricing reflects this continued supply and demand inbalance. However, the continued strong industrial market may have a developing problem that has already begun to surface – increased property taxes which will affect vacancy and rental rates and, ultimately, industrial property values. In most industrial real estate, property taxes are ordinarily paid or reimbursed by the tenants as part of net lease arrangements. As property tax assessments “catch up” on reassessing industrial properties due to historic increases in value in the past several years due to rising rents adn demand, and declining supply, the new resulting assessments may cause spikes in property tax payments which will ultimately make industrial space less affordable and decrease demand.
According to a report by Savills North America, the reactions of local governments around the country – especially in major markets like New Jersey where property taxes are high – have raised taxes significantly in response to large increases in asset pricing. The Savills report indicates that industrial real estate values have risen more than 70% across 11 major North American markets in the past 5 years, compared to less than 5% gains in value for other commercial real estate sectors. However, with respect to New Jersey, the report accurately notes that not all property increases will translate into direct property tax hikes, as many commercial redevelopment projects in the Garden State are the product of local redevelopment efforts where long-term fixed tax payments can and are secured through a Payment in Lieu of Taxes (“PILOT”) agreement to incentive such projects: “New Jersey’s PILOT (Payment in Lieu of Taxes) programs offer developers a fixed-term payment lower than standard property taxes to encourage urban infill development”.
This issue was also the subject of a recent article in GlobeSt.com, “Property Taxes Put the Squeeze on Industrial“, where it noted that either net operating income or rent pricing, or both, are likely to suffer as tenants are asked or required to pick up the tab for increased property tax payments resulting from higher values that have been established in recent years, as local towns are “catching up” in their tax assessments. For example, an industrial property which may have been assessed at value of $50,000,000 with a local tax rate of 2.44 (the reported average tax rate in Middlesex County which has a large industrial real estate base) which experiences a 70% increase in its assessed value (up to $85,000,000), would be subject to a annual property tax increase from $1,220,00 to $2,074,000, or more than $800,000 per year. These types of increases cannot be sustainable without market value impacts.
How will this issue play out in a heavily-taxed state like New Jersey? Real estate value is supposed to be driven by “location, location and location” but, eventually, if the users cannot afford to pay increased prices and expenses for even well-located real estate, then market demand and asset values will have to suffer negative impacts. This is not likley to cause immediate impacts, but may linger and grow as the future unfolds.
Fortunately, property tax assessments in New Jersey are reviewable every year. The “assessment date” used for property tax purposes in New Jersey is October 1st of the preceding year, meaning that, for a 2025 appeal, the value of the property as of October 1, 2024 is at issue. With that in mind, if industrial real estate values do decline on or before October 1 this year, property owners (or commercial tenants who are responsible for paying property taxes who may also have the right to file an appeal) should consider reviewing their assessments for the purpose of determining whether a tax appeal in 2025 may be viable.
If you believe that your property tax assessment is not fair or accurate, it is prudent to contact an experienced tax appeal attorney who can help you navigate through the specifics of each individual case. If you have any questions concerning your property tax assessment, contact McKirdy, Riskin, Olson & DellaPelle, P.C. to speak with an experienced attorney, or write to us at info@mrod.law.
