In our whitepaper, “What’s the deal with all the Op/Ex?”, we discussed the Fall 2015 lawsuit filed by the City of Austin against the Travis County Appraisal District and the effects it would have on property valuations and operating expenses. This lawsuit, combined with a strong commercial real estate market, resulted in dramatically higher commercial property taxes in 2015, and, in turn, 2016 saw a sharp increase in average operating expenses (op/ex) for commercial tenants.
So, as landlords began to release their 2017 operate expense estimates, we asked: How do they fare compared to years past? With 2016 appraisal and tax rate values now available, we wondered: Were the dramatic increases seen in 2015 and 2016 a blip or the start of a new norm?
For our analysis, we looked at 30 randomly selected competitive set office properties across the three primary Austin submarkets (CBD, Northwest, and Southwest) whose op/ex numbers we track every quarter. For these buildings, we then found their appraised values and tax rates from 2011-2016 (these values are not yet released for 2017). From these values, we calculated changes in op/ex and taxes, as well as the percentage of op/ex that is comprised of taxes.
What we found in our analysis is that the dramatic increases in assessed values in 2015 and operating expense values in 2016 were, in fact, more corrections in the market than a long-term trend.
Interact with the data used in our analysis above by selecting suburban or CBD buildings, or choose one or more of the 30 buildings sampled to see how they fared.
From 2015 to 2016, assessed values only increased 12.6% year-over-year, compared to the 26.7% increase we saw from 2014 to 2015. Meanwhile, tax rates decreased, on average, by six basis points to 2.24%.
These two factors lead to landlords having to pay an average of 9.5% more in taxes per square foot of rentable area in their buildings in 2016 than in 2015. This same year-over-year increase was a staggering 23.5% in 2015.
In 2017, tenants are now being quoted operating expenses just 4.2% higher than in 2016. This shows that property managers have reason to believe that 2017 property valuation increases will not be as shockingly high as they were last year, giving tenants slightly more breathing room when it comes to their full service rental rates.
For an in-depth analysis on the implications of the 2015 lawsuit and corresponding 2016 operating expense hikes, check out our whitepaper “What’s the deal with all the Op/Ex?”.