Industrial May Resemble A Rocket Ship, But Here's How To Keep Assessments Down To Earth

The industrial real estate sector finished 2021 on a high note, with Cushman & Wakefield reporting record-low vacancies as well as record-high demand for industrial space in Q4. The commercial real estate services firm called the industrial market “as competitive as it has ever been.”

The positive report continued a trend going back to at least mid-2020. Fueled by the dramatic growth of e-commerce, warehouses and distribution centers have been in historically high demand across the country.

Some tax experts, however, suggest the statistics obscure a more complicated reality at the local level, and offer advice on how to keep assessments from getting out of hand.

“It seems like every quarterly report that comes out on industrial is record-breaking,” said JW Burns, director of property tax consulting with Ryan Property Tax Consulting Services.

That trend is largely due to a major change in consumer behavior. During the pandemic, people stopped visiting malls and instead began doing much of their shopping online from the comfort and safety of their homes. That set off a race among e-tailers to find warehouse and distribution space in a competitive environment where demand outpaces the available supply.

“Beginning in the summer of 2020, we saw rising demand for more warehouse space, and it has been a rocket ship ever since,” Burns said. “All of this e-commerce is flowing through distribution centers, either in the big, million-square-foot buildings out in the suburbs or in those last-mile spaces in urban infill areas. As land prices increase, we also are seeing more industrial development in tertiary areas further from metro centers.”

Local taxing authorities are aware of those trends and are no doubt anticipating levying higher assessments on industrial landlords. But the situation is actually more complex than record-low vacancy rates alone might suggest, Burns said.

He noted that not every industrial space has benefited from the industrial boom. Others have seen their facilities depreciate as they struggle to keep warehouses operating around the clock. Those trends need to be factored into assessments. 

“It's not all completely rosy out there; there's definitely a dark side to industrial that isn’t reflected in the statistics,” said Jerry Heaton, a director at Ryan. “Owners and their tax advisers need to find ways to convince assessors that this trend will not continue forever and poke holes in arguments that would seem to support raising their taxes.” 

For starters, not every warehouse tenant’s business is doing well. Many businesses, such as brick-and-mortar retailers who rent out industrial space to house their excess stock, were struggling even before the pandemic struck. Then, beginning in 2020, many more companies, such as those serving the foodservice sector, joined the ranks of struggling companies. 

“I like to look at the viability of each tenant very closely,” Heaton said. “Industrial markets are doing well so long as you have an Amazon-type client, but Amazon is not the only tenant out there and many other businesses are struggling to pay rent. That creates uncertainty, which equals higher cap rates and lower income for the landlord.”

Adding to a landlord’s potential problems is that a vacant 100K SF industrial space is not easily refilled if a warehouse loses a major tenant, such as a retailer that has gone bankrupt.

“It may take a year or two to find a new tenant,” Heaton said. “Meanwhile, you're paying property taxes and insurance on a vacant building.”

Owners of older industrial spaces who are fortunate to have e-commerce companies in their tenant mix are not without their challenges, either. 

To keep up with demand, many owners have converted existing spaces to accommodate around-the-clock operations. Their facilities are buzzing, but this leads to additional wear and tear.

“A building might have a 20-year-old HVAC system that was designed for an eight-to-five operation and all of a sudden it's now working 24/7 at three times its intended capacity,” Heaton said. “There's a likelihood that deferred maintenance issues are going to be coming up much, much faster under these conditions.”

This is something that might be invisible to the local tax office, and Heaton said it’s important for owners to raise these issues during the appeal process.

“A new HVAC system could cost millions of dollars,” he said. “We look at variables like deferred maintenance from a tax perspective so we can use them to drive values down.”

Burns said industrial owners need to be vigilant about these trends if they want to protect themselves from unfairly high tax assessments.

“The assessors are well aware that the news out there is great for industrial, and so initial values are going to be increasing across the country,” said Burns, who predicted industrial property tax increases of 8% to 10% in many parts of the country in 2022. “But you’ve got to work the appeals process to make sure you’re not being treated unfairly and overtaxed, certainly compared to your competitors.”

This article was produced in collaboration between Studio B and Ryan. Bisnow news staff was not involved in the production of this content.

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