Commercial Appraisals Soar In 'Aggressive' Harris County, And Multifamily Is Seeing The Worst Effects

Homeowners weren't the only people to find surprising appraisal notices in their mail this spring.

The Harris County Appraisal District issued 100,000 commercial notices this year, and though tax experts say appraisals rise every year, some city officials and CRE experts were shocked by just how high and fast values spiked — most especially for multifamily properties.

It could mean a wave of sticker shock ahead for landlords and tenants who will be tapped to shoulder the burden of far higher taxes.

"Property values in Harris County are rising, as across the state. That is not new," Harris County Chief Appraiser Roland Altinger said in a market trends presentation earlier this year that covered both residential and commercial spikes. "[It's] unprecedented. In my almost 40 years in the real estate business, I have never, ever seen such a massive increase in market values." 

Commercial values — from initial 2021 certified values to finalized 2022 noticed value — rose 18% year-over-year, according to the county. That's after already rising 16.76% in 2020, per CBRE data.

Though all asset classes saw increased values, the pain hit some more than others, especially those sectors that fared best through the pandemic. Warehouses saw an average 19% bump and retail properties jumped 17.8%. But it was multifamily properties that rose the most, gaining an average of 24% in value. 

Houston CRE experts say Harris County, one of the largest appraisal districts in the country, is unusually aggressive in how it values properties, with some citing increases of as much as 50% this year.

The increase in tax values has brought a wave of landlord discontent and some believe 2022 will see a huge increase in appraisal contentions.

"We expected an increase, we just didn't realize how much of an increase once the values came out," Christopher Daugherty, director of Altus Group's property tax division in Houston, told Bisnow. "Our landlord clients immediately were on the phone with us trying to figure out how to mitigate those risks, because the taxes, in most cases, are passed through to the tenants."

In 2014, the city of Austin sued the Travis Central Appraisal District, alleging that Travis County was undervaluing properties, and unfairly prioritizing commercial and vacant property. The city lost that lawsuit, per KUT, but the fallout was enough to convince other county appraisal districts to look hard at valuations in the years since, according to CBRE Valuation and Advisory Director Henning Christensen.

The Harris County Appraisal District did not respond to a request for comment. But Christensen speculated the increases, based on the previous 12 months of real estate transactions, reflect a market very different from today. 

"We had two years of the low cost of capital, which pushed cap rates lower and therefore valuations higher," he said, adding recent interest rate hikes have changed the picture. 

There is also the complication that businesses in Texas, per state law, do not have to provide sales price information to local appraisal districts. That means Harris County officials must often rely on news articles, its broker network, mail surveys, and other methods to estimate what properties within county lines are worth. 

"We've learned to live with it in Harris County," The Hanover Co. Industrial President David Hudson said. "It's just something you've come accustomed to doing business with [here]."

Hudson noted Harris County taxes are still affordable compared to other American metros. But renters of multifamily units could feel a disproportionate part of the pain.

Many commercial tenants are on triple-net leases and therefore won't see the huge base rent increases that are likely in store for multifamily residents when landlords pass the tax bill pain downhill. Additionally, while most CRE landlords have a relatively successful history of cutting appraisal hikes to a more manageable percentage by the time it affects their tax bill, that's less true for multifamily, according to Christensen and CBRE data. 

Christensen said that, of all asset types, it's the multifamily hikes that concern him most. Consistently since 2017, he said, landlords of lower-grade multifamily properties have been less successful in bartering down appraisals because they often don't have the information or resources other commercial landlords can tap.

"There is real concern when it comes to multifamily and this has been the trend for the last five years, especially for [the] lower tier of assets," he said. "Compound this trend over the course of five years, and the assessment and subsequent tax burden unshifts unevenly towards this asset class of ownership."

As one example, 2019 retail assessments were ultimately slashed two-thirds, from an initial 21.3% increase to a final 6.68%. By contrast, multifamily landlords only saw their assessments halved that same year, leaving them little choice but to pass on the pain.

That's of special concern when Houston rent growth is already up 10% year-over-year as of January 2022, according to Yardi Matrix, amid a fiery market that saw $10.4B in 2021 multifamily transactions.

The average Houston rent for a one-bedroom apartment was $1,381 as of May, per Apartment List, which estimated one-bedroom renters need to make $55K a year to keep their rent to 30% of their income. Houston's median household income is about $53.6K, according to the U.S. Census Bureau.

"Multifamily was very hot, and was hot throughout the state of Texas, from the appraisal district's perspective and from the investor's perspective," Christensen said. "Appraisal districts around the state have really gone after multifamily."

Most commercial landlords are expected to protest the increased taxes on their properties. Daugherty said it's a tedious, but typical process.

"It's kind of that cat-and-mouse game, where they try and raise the value, we fight to lower the value," Daugherty said. "Property taxes are the highest operational cost (a landlord will) have. You want to do anything and everything you can do to mitigate those costs."

Some relief may be on the way in the next tax cycle. Christensen thinks with federal interest rates on the rise along with expected cap rates, 2022's appraisal heights might represent a peak.

"We expect 2022 is going to be the high-water point in terms of assessment," Christensen said.