Homeowners must receive a notice of appraised value from their assessment district by mid-April. This year, it is imperative that commercial property owners submit a valuation protest before the deadline and help establish fair taxable valuations in the post-pandemic market.
Since March 2020, COVID-19 has brought ongoing uncertainty and challenges to property owners. People often discuss the “winners and losers” of commercial real estate from COVID-19, and of the four food groups in commercial real estate, retail has certainly taken one of the heaviest initial hits. But how has the type of ownership recovered as the pandemic has evolved? This article explores where exactly retail stands, then offers strategies to more effectively advocate for reduced valuations.
To paint a full picture of the current state of shopping malls, one has to go back to 2019 and early 2020 before the pandemic. In 2018, around 5,800 retail stores closed nationwide and only 3,200 opened, for an overall shortfall of 2,600 locations. In 2019, the size of the annual store deficit nearly doubled with 5,000 more closings than openings. E-commerce sales volume grew steadily from 2010 to 2019, which, coupled with accelerating brick-and-mortar store closures, clearly indicates a slowing of the need for traditional storefronts.
In 2021, county assessors were generally conservative in increasing values, primarily due to pandemic-related issues such as tenants closing and landlords forced to defer and reduce rent. Additionally, shopping center transaction volume has plummeted throughout 2020, forcing rating districts to rely on limited data to arrive at market rents and cap rates for their 2021 models. .
County assessment districts preparing assessments for 2022 will most likely attempt to significantly increase assessed values to reflect what they see as a retail rebound that has occurred in 2021. Although assessors can conclude that retail is recovering well as the pandemic evolves, data and general trends are failing. to support this position.
If a valuation district takes an aggressive stance to boost values, citing the “booming return to in-person retail shopping,” it will be crucial for callers to show the lingering state of uncertainty in the market. commercial real estate. To that end, the following three strategies will be critical to successfully advocating for reduced assessments:
1.) Consider Tenant Diversity
When appealing assessed values, either during the administrative process or later in district court, landlords should consider the tenant mix of their malls and how the pandemic has affected their retailers.
For example, a center containing a dry cleaner and a trampoline park will take those tenants much longer to recover from the pandemic than many other properties. With working from home becoming the norm, many people no longer need ironed clothes. Moreover, ball pits and trampolines crowded with children do not sit well with a pandemic-aware society.
These trends are reflected in rents, with rates for specific uses such as these flattening or even decreasing since the start of the pandemic.
2.) Review the Ranking
The second strategy for attractive values is to review how property is classified on tax rolls. As many landlords begin to use the space in alternative ways, the center may no longer function entirely as a mall. In other words, it may be more appropriate for it to be given a light industrial or distribution center classification.
Amazon, for example, has been steadily converting malls into last-mile fulfillment centers for the past six years. Amazon converted about 25 malls into fulfillment centers between 2016 and 2019, according to Coresight Research. Converting stores to retail space in a mall will significantly reduce foot traffic for all remaining tenants and negatively affect the customer experience, resulting in a lack of desirability for retail investors.
3.) Footprint Reduction
It’s no secret that consumer visits to physical outlets are nowhere near pre-pandemic levels. Black Friday foot traffic in 2021, for example, is down about 28% from 2019 levels, according to data from Sensormatic Solutions.
While in-person shopping will likely remain a part of the retail experience, there is a lingering sense of uncertainty surrounding its importance, especially with the strong adoption of curbside pickup.
Some large retailers have solved this problem by reducing store staff. Target stores, for example, have historically averaged 130,000 square feet, but of the 30 stores the brand opened in 2020, all but one used a smaller format, according to pymnts.com. These small format and college campus stores average 40,000 square feet, while some are much smaller.
It is reasonable to suspect that other retailers will follow suit, rendering many larger anchor spaces in malls obsolete and harder to fill with tenants. As the tide shifts to a “less is more” philosophy when it comes to store footprint, rating districts and ratepayers should factor this increased risk into value calculations by raising capping rates in their models.
Not only is the shrinking store footprint and conversion of space to distribution uses increasing the level of uncertainty for the asset class, but last mile distribution centers are also failing to command the retail rents.
When shopping center owners receive property tax assessed values in the coming months, they should compare the assessments to the values received in previous years, particularly 2019. If the assessment trend for a particular property does not makes no sense, either due to the overall uncertainty and risk surrounding brick-and-mortar retail or due to property-specific issues such as tenant diversity and space utilization – it will be extremely important for the taxpayer to take action in protesting the assessed value of the property.
Sam Woolsey is a property tax consultant in Austin, Texas, law firm Popp Hutcheson PLLC, which focuses his practice on property tax litigation and is a Texas member of the American Property Tax Counsel (APTC), the affiliate National Lawyers in Property Taxation. Contact Sam at [email protected]