According to a recent SWBC blog, the Texas commercial real estate market is up against unique challenges in 2023, with ongoing inflation, the potential for a recession, and a slew of legislative measures aimed at altering property tax policies. Understanding these changes and their potential impact is crucial for commercial property owners in the office, retail, and industrial sectors.

The blog post provides an outlook on each of these sectors, highlight recent developments, and offer advice on how to navigate the dynamic landscape to minimize property tax burdens.

NEW WORK MODELS AND ECONOMIC PRESSURE IMPACT OFFICE SECTOR

The office sector in Texas is facing a modern challenge as flexible work models reduce demand for office space. A turbulent economy is further compounding the problem as companies cut back to brace for a potential recession. Not even Austin’s dynamic growth seems able to soften the blow. In the capital city, sublease vacancies jumped to 30% in Q1 2023.

However, as the economy recovers and businesses pinpoint work models that are beneficial for both operations and employees, we expect to see a slow-but-steady increase in demand. Speaking to Commercial Property Executive, Jason Morin, CBRE Americas Head of Office Research, speculated that nationwide office utilization may only be down an average of 15% compared to pre-pandemic norms.

Property owners should be prepared for fluctuations in property tax assessments due to these changes in market conditions.

RETAIL VACANCIES REMAIN LOW IN MAJOR TEXAS CITIES

Retail properties have been hit hard by the rise of e-commerce, labor shortages, supply chain issues, and changing consumer preferences. Still, 60% of consumers recently reported they preferred an in-store experience. Retailers may need to lean on technology, like streamlined digital payments and automation, to provide quality consumer experiences with limited staff and a smaller footprint.

According to Weitzman’s 2023 Shopping Center Review & Forecast, Austin, Dallas-Forth Worth, Houston, and San Antonio are experiencing healthy retail occupancy levels above 90%, with Austin leading Texas’ major metro retail markets. All four cities are expected to face potential economic softening from a position of financial strength.

Factors such as industry and location continue to bolster retail properties. Necessities like grocery stores, pharmacies, food service, and personal grooming remain in demand, although JP Morgan suggests that shopping in well-populated residential areas will outperform urban retail.

As a result, property taxes for retail properties may be more volatile in the short term. It’s essential for owners to monitor market trends and ensure their property tax assessments accurately reflect current conditions.

INDUSTRIAL PROPERTIES REMAIN STABLE, FOR NOW

The industrial property sector has remained relatively stable, with demand for warehousing and distribution centers driven by the growth of e-commerce and home delivery.

According to construction consultants Gordon Highlander, there were an unprecedented 76 million square feet of industrial construction projects underway in Dallas-Fort Worth at the end of December 2022. The firm also noted the bustling oil & gas industry in Texas has further propped up the industrial construction market but will see new construction slow down as developers eye the tenuous market and interest rates.

Property owners should keep an eye on any market shifts, as the ongoing inflation and potential recession could impact property tax assessments.

2023 TEXAS LEGISLATIVE SESSION UPDATES

Once again, property tax relief is a top priority this legislative session with competing proposals coming from both chambers. The House has proposed HB 2, which would put $12 billion into Texas school districts to lower property taxes. Also, it would lower the appraisal cap from 10% to 5% and expand the benefit to owners of business properties.

The Senate has its own $16.5 billion property tax relief plan, which is much different than what The House proposed. SB 3 proposes to increase the state’s homestead exemption from $40,000 to $70,000 and includes an additional $20,000 exemption increase for disabled individuals and seniors. A second bill, SB4, proposes to lower school property tax rates by $0.07 for every $100 in property value.

It’s important for property owners to stay informed about these changes and how they may affect their property tax liabilities.

FOUR WAYS TO REDUCE YOUR COMMERCIAL PROPERTY TAX BURDEN

1. Monitor Market Trends

Staying informed about market trends in your specific property segment can help you anticipate potential shifts in property tax assessments and make informed decisions.

2. Be Proactive

If you believe your property tax assessment does not accurately reflect the current market conditions, consider filing a protest. A property tax consultant can assist with this process and ensure you have the best possible chance of success.

3. Watch for Legislative Changes

The ongoing Texas legislative session could result in new laws or regulations that impact property owners. Staying up to date with these developments will help you anticipate and plan for any changes in property tax liabilities.

4. Consult an Expert

Engaging the services of a property tax consultant like SWBC Ad Valorem Tax Advisors can help you stay ahead of market changes and legislative developments, and ensure your property tax assessments are accurate and fair.

Although the Texas commercial real estate market is up against numerous challenges in 2023, commercial property owners in office, retail, and industrial sectors shouldn’t feel helpless. By staying informed, engaging with experts, and proactively managing their property tax obligations, they can navigate these challenges more confidently and potentially lighten their property tax burdens.

Source: Gary Rivas, April 2023. Rivas is a Texas licensed Senior Property Tax Consultant experienced in providing Industrial, Commercial, and Residential property tax reduction advisory services for real and personal property in Texas and multiple states across the country. He has 31 years of experience in the Property Tax Profession with 27 years as a Property Tax Consultant, and 34 years as a licensed Texas Real Estate Agent.

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According to the latest MSCI Inc. estimate, more than $42.5 billion in commercial properties were sold in DFW in 2022. North Texas “wrested the top slot from Manhattan at the onset of the pandemic and has held it ever since,” MSCI analysts said in the report.

Dallas-based CBRE was the top-ranked firm for commercial real estate investment sales nationally in 2022—for the 17th straight year.

Dallas-Fort Worth has led all major U.S. metros for commercial property deals for three years in a row after extending the streak in 2022.

That’s despite a slowdown in transactions in the final months of the year.

According to the latest MSCI Inc. estimate, more than $42.5 billion in commercial properties were sold in the DFW area in 2022, but that’s down 15% from 2021′s record total for deals. Read More >

Murray, L. (2023). DFW Tops U.S. Metros in Commercial Property Deals for 3rd Year in a Row. Dallas Innovates. https://dallasinnovates.com/dfw-tops-u-s-metros-in-commercial-property-deals-for-3rd-year-in-a-row/

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Some say you’ll find a pot of gold at the end of the rainbow. Those involved in commercial real estate in the Dallas-Fort Worth metro claim to know differently.

“I say it’s at the end of 121,” McKinney Mayor George Fuller said.

Investment, development and economic opportunity are flourishing along the state highway running through Collin County, the nation’s fourth-fastest-growing county and home to North Dallas’ most affluent suburbs, including Allen, Plano, Frisco and McKinney.

Home to regional and national hubs for Toyota, UPS, FedEx, Southwest Airlines, Motorola and the Dallas Cowboys, among others, Collin County has become a magnet for big-name companies and investment and people.

And panelists at Bisnow’s Oct. 28 Innovation (121) Corridor event say the boom times along and near the artery referred to as “rainbow highway” are far from over, with McKinney alone counting 115 square miles of available and developable property, Fuller said. McKinney already has 68 acres under development and a roster of recent wins such as banking firm Independent Financial’s plans to triple the size of its campus in the Craig Ranch development and the $750M Craig International project at District 121 anchored by Kaizen Development’s 200K SF eight-story office tower.

“We’ve done work all over Texas, we’ve done Oklahoma, Kansas, Arkansas, things like that. But at the moment, almost the entirety of our work is focused in the DFW area, and primarily in the Collin County area, because that’s where most of the expansion and growth is happening,” McRight-Smith Construction President Andrew Smith said. “There’s a lot of infill work to be done. There’s a lot of population-driven growth. And we see the businesses following them … There are still lots of opportunities to build for lots of different types of groups.”

Smith said there is no end in sight for new development along the 121 Corridor, with a number of companies already planning projects for three to four years from now and a pipeline that shows no signs of tailing off. Some of the long-term planning is in response to rising materials costs, which are extending timelines further into the future. But the bulk of the momentum is being driven by population shifts in a market that is growing by 100 residents daily, making way for a stream of employment centers, housing, medical offices and retail.

“You guys will probably read three articles today in a newspaper that tells you retail is dead. Retail is not dead, it’s just evolved,” he said. “You can’t Amazon a haircut or an ice cream cone. There’s going to have to be somewhere to get stuff.”

Most panelists predicted Collin County’s run would last until at least 2030. Kaizen Development Partners CEO Derrick Evers said his company’s analysis uncovered numerous gaps and opportunities along the corridor, including a relative dearth of Class-A office space.

“There’s a tremendous opportunity because there’s a lot of gaps to be filled,” Evers said. “And then you want to make 24-hour communities, to have an office where you have daytime traffic because if you’re a retailer, you can’t survive on nights and weekends alone, you do need that full cycle. To the extent that we can bring housing, bring daytime traffic with office, where you have the retailers here, it becomes this community.”

Allen-based JaRyCo Development President Bruce Heller said the attraction of developing in Collin County comes down to local governments working as partners instead of adversaries. That means not just understanding economic development, he said, but elevating the importance of good public schools, strong transportation links, and other public amenities to the young, well-educated families flocking to the county.

“You got these great cities — Allen and Plano and Frisco and McKinney — that all understand business … and they know the challenges that come with development,” Heller said. “I just think it’s sort of a perfect storm of everything coming together.”

That’s the mix, in part, that brought the AT&T Byron Nelson Golf Tournament, which Salesmanship Club of Dallas President Mike McKinley called the PGA Tour’s premier charitable fundraiser, to Collin County this year after seven decades in Dallas County. The tournament, supporting the Momentous Institute, held its first event at TPC Craig Ranch in McKinney in May.

“We walked into a room with about 25 leaders of the McKinney community, the business community, the city of McKinney, and within about 15 minutes, our tournament director and I kind of looked at each other and we knew we were home,” McKinley said, adding the charity, which fosters social-emotional health for children and families, netted $5.5M in its first year despite PGA limits on the number of people that could be hosted due to the coronavirus pandemic.

Independent Financial Chairman and CEO David Brooks said the ability to land prestigious events and the bustle of activity up and down the corridor testified to the intensity of interest in the area, which he called a national phenomenon unmatched by anywhere else in the country. Brooks noted he is speaking to people around the country interested in investing in the area.

In an environment as rich with capital as he has seen in his career, he said, opportunities still abound: “Take a drive [and] next time don’t pay attention only to what you see, all the buildings, and pay attention to all the land that is still undeveloped. The momentum here is going to continue on, I think, for 10 years into the future.”

BizNow. (2021, November 4). There’s Still Plenty Of Gold To Be Found At The End Of DFW’s ‘Rainbow Highway’ [News post]. Retrieved from https://www.bisnow.com/dallas-ft-worth/news/economic-development/dfw-121-event-110786

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Historically, gateway markets such as New York, Boston, and San Francisco have positioned themselves as the “gold standard” for international investors to deploy capital. Major companies focused on these cities due to talent, limited supply constraints, and an educated labor force.

However, if 2020 showed anything, it pointed to these cities’ potential flaws, including massive shutdowns, high taxes, and a large exodus of population. This year, California’s population shrunk for the first time in the state’s history.

Fast-forward to today, global investors from global markets such as Saudi Arabia, Korea, Hong Kong, and London that have significant capital to invest in should consider Dallas. Here’s why:

1. Coming Out Of The Pandemic, Dallas Is The Best-Positioned Market For Business In The U.S.

According to the Dallas Regional Chamber, the greater Dallas area includes headquarters for 42 of the Fortune 1000. Large companies that call North Texas home include McKesson, ExxonMobil, AT&T, Kimberly-Clark, Charles Schwab, Southwest Airlines, American Airlines, 7-Eleven, GameStop, AECOM, Comerica, and Toyota North America, to name a few. With friendly taxes, ample land for development, and a free open labor market, Dallas will be the next HQ2 for many companies, such as Goldman Sachs and its HQ2.

2. Texas Is Surpassing Every State In The Race For California Company Relocations

According to a study by Spectrum Location Solutions and Stanford University’s Hoover Institution, Texas is claiming the headquarters of California companies at more than four times the rate of its nearest competitor. Nearly half of the companies that moved from California so far this year have landed in Texas, according to WFAA. It’s clear: People vote with their feet.

3.  Dallas-Fort Worth Leads The Nation in Overall Population Growth

Dallas-Fort Worth led the country in population growth last year, adding 120,000 residents from 2019 to 2020, according to the U.S. Census Bureau. Just recently, Amazon announced its plans to hire 11,000 workers in Dallas-Fort Worth and offer $1,000 sign-on bonuses. Additionally, Transwestern research highlights how urban density is here to stay as Dallas is expected to become as big as Chicago by 2035. Dallas remains well-positioned and could experience growth dynamics similar to the 1980s energy boom.

The PwC’s Emerging Trends in Real Estate® Report named Dallas the No. 4 market to watch in 2021 and the No. 1 market in its 2019 ranking. The report highlights that “cost-conscious companies will gravitate toward cities that are business-friendly, feature low cost of living and include large, growing workforces.” This description perfectly matches Dallas.

As companies continue to enter the greater Dallas market, they will need high-level consultation with site selection and workspace strategy.

Dallasites have their sights set on the future. Institutional capital would be remised to overlook Dallas when investing in commercial real estate based on positive fundamentals and demographic growth.

As they say, “Don’t mess with Texas.”

Billy Gannon is Senior Vice President at Transwestern.

D MAGAZINE. (2021, October 12). Dallas: The ‘Third Coast’ [News post]. Retrieved from https://www.dmagazine.com/commercial-real-estate/2021/10/dallas-the-third-coast/

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While DFW’s office market struggles with the thorny issue of returning to the office and how much space tenants will need in a post-pandemic world, the region’s industrial market is booming.

Across North Texas, demand for industrial space is pushing vacancies lower and rents higher. That’s great news for owners who are enjoying higher property values. But at the same time, industrial tenants are grappling with fewer options and higher occupancy costs.

In an environment where demand exceeds supply, what can these companies do to ensure they have the industrial space they need, when they need it, and for a price, they can live with?

Throughout the pandemic, we’ve all heard about supply chain disruptions. First, it was toilet paper, then it was pork, and now it’s all kinds of materials, from semiconductor chips to steel.

The pandemic forced consumers to change the way they shop. Recent forecasts predict e-commerce sales will account for 30 percent of U.S. retail sales in the coming years. Amazon accounted for roughly one-third of all e-commerce sales and occupied 10 percent of all industrial space in the U.S. That translates into roughly 2 billion square feet.

Fewer visits to stores and more online shopping translate into more demand for warehouse and distribution space. In fact, experts estimate that e-commerce requires about three times the amount of warehouse space relative to physical retail space.

E-commerce only represents a portion of overall industrial demand. Other industries such as automotive, petrochemical, and technology are expanding too.

Again, this strong demand is good news for the overall economy. Yet, it also represents additional difficulties for companies seeking industrial space, either as part of an expansion or a new location.

For DFW specifically, it’s a perfect storm of low-interest rates, pent-up demand from the pandemic, e-commerce, population growth, global trade imbalance, and the growing need for backup/safety stock.

Dallas-Fort Worth is considered one of the “elite” industrial markets, ranking alongside Northern New Jersey, Long Beach, Chicago, and Atlanta. Industrial users are attracted to North Texas for several reasons, including its central location, two airports, expansive rail infrastructure, the intersection of several major interstates, and deep labor pool. All these attributes make it a super-regional distribution hub.

The total industrial market in DFW consists of just over 832 million square feet, and at the end of 1Q21, the vacancy rate was 5.4 percent, according to CBRE. The decrease can mostly be attributed to occupiers taking vacant existing buildings and strong pre-leasing for product delivered over the quarter.

Furthermore, the first quarter marked the 42nd consecutive quarter of positive industrial absorption in DFW, following five years of demand surpassing 20 million square feet from 2016 to 2020. The trailing 12-month absorption was 27.4 million square feet, and 10.3 million square feet in new leases were signed during the first quarter.

Meanwhile, rents are also rising across the DFW – asking rents are averaging over $5 per square foot – and will likely outpace inflation in the next few years. This means almost all leases signed in the last four years in Dallas are below market.

If you’re a tenant, you can act now to prepare for the future and protect yourself against competitive pressure and paying a higher rental rate.

If you need more space, you may want to consider renegotiating with the property owner now before your lease comes up for renewal. It’s a landlord’s market, but you may be able to get a rent reduction if you take additional space or sign a long-term lease.

Some tenants are digging further into potential consolidations within their footprint and investing in technology to utilize their space better. Even trying to control operating costs is important as few tenants actually know their all-in real estate costs behind the initial face rate.

If you’re a tenant with future expansion plans, consider buying your current building or a new facility, either yourself or with an investor like Mohr Capital. Even if it’s larger than you may need. You always have the option of subleasing the excess space until you can utilize the balance in the next year or two.

Finally, if you’re an owner-occupier and you’re looking for a way to fund a business expansion, you might want to consider selling your building and leasing it back. Investor demand is fierce, and property values are increasing daily. In short, you are monetizing the value of your tenancy while the market is at a historic high.

I’ve been involved in DFW commercial real estate for nearly four decades, and I’ve never seen more demand for industrial properties from tenants or investors. That’s why I feel confident saying that everything’s coming up roses for DFW industrial.

Bob Mohr is the founder of Mohr Capital and Mohr Partners.

D Magazine. (2021, June 17). Everything’s Coming Up Roses for DFW’s Industrial Market [News post]. Retrieved from https://www.dmagazine.com/commercial-real-estate/2021/06/everythings-coming-up-roses-for-dfws-industrial-market/

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