Main Takeaway: OPEX costs are literally going through the roof, and property taxes are no exception for multifamily owners. Here’s where they are rising the most and what investors can do to minimize them.
Story: The saying should go: “There are only three certain things in life: death, taxes, and rising OPEX.” Or was the third certainty that Carole Baskin from Tiger King 1000% killed her husband? Either way, we checked, and we are pretty sure this was the original Ben Franklin quote until it became a mainstream idiom.
Rising operational expenditures due to inflation over the coming years will be tricky for multifamily investors and owners. Debt costs are skyrocketing, insurance costs are increasing, inflation is keeping material, labor, and maintenance costs high, and now we have to worry about property taxes increasing, too, according to a new report from Trepp.
Don’t worry; you don’t need to read the entire report. We pulled an all-nighter and came up with a few key takeaways for concerned investors and owners.
The aftermath of the pandemic witnessed a surge in multifamily property values in certain metropolitan areas. This increase in property value was accompanied by a corresponding rise in property tax, indicating the interconnected relationship between property valuation and taxation.
From 2021 to 2022, the five cities experiencing the largest year-to-year hikes in multifamily property taxes were: Richmond, VA at 15.3%; Orlando-Kissimmee-Sanford, FL at 12.2%; Salt Lake City, UT at 11.9%; Virginia Beach-Norfolk-Newport News, VA-NC at 10.9%; and Chicago-Naperville-Elgin, IL-IN-WI at 9.9%.
Among the top 15 cities, New York-Newark-Jersey City, NY-NJ-PA had the smallest rise, yet it was still 6.1%.
These increases often resulted from changes in population distribution and escalating property values. Richmond serves as a case in point. Trepp notes that the mounting living expenses in Northern Virginia and the necessity for train commutes between Richmond and D.C. led to a 36% surge in people moving from Northern Virginia to Richmond in 2020 and 2021. This is a significant rise compared to the period from 2012 to 2019.
Salt Lake City
In 2022, Utah witnessed a remarkable surge in home prices, particularly in the Salt Lake City area where the median residential property value soared by 28.7% compared to the previous year. Post-pandemic, while residential home values skyrocketed, the growth in commercial property values was more tempered, registering an 11.8% increase during the same period in Salt Lake City.
With such differential growth rates, it’s no surprise that the tax implications were more pronounced for the property category experiencing the steeper valuation increase. Among commercial properties, multifamily units stood out prominently. The city, with its burgeoning young renter demographic and an influx of residents from pricier West Coast cities, found its rental market heating up more intensely than its residential counterpart.
This surge was attributed to many potential homeowners being sidelined by the escalating single-family home prices, thereby boosting demand for apartments. In fact, in 2022, a staggering 76% of prospective homeowners in Utah found themselves priced out and redirected to the rental market. Unlike other commercial real estate segments, the multifamily sector shouldered a heftier tax responsibility due to its rising valuations, paralleling the residential sector.
Furthermore, the Salt Lake City Council sanctioned a 4.9% hike in property taxes, effective from the fiscal year commencing in July 2022. This marked the city’s first such increment since 2014 and was aimed at addressing the growing demand for municipal services. As Salt Lake City grapples with a population surge, pandemic recovery, and inflation simultaneously, the enhanced city services costs, influenced by rising labor expenses, necessitated this tax adjustment. These augmented property taxes will likely manifest as increased rent for those residing in multifamily units.
According to a recent survey, 73% of developers predict that operating costs will increase between 0-9% this year, while 23% say the increases will be between 10-19%.
The unique appeal of multifamily properties lies in their potential to provide steady rental income streams. This, coupled with their relatively lower risk when juxtaposed against other commercial property types, made them particularly enticing for investors, especially during uncertain economic times.
As property tax assessments catch up to the rise in values over the past 5 years, investors and owners will need to pay more attention to that proforma and OPEX line item. Some jurisdictions also allow a process for re-assessment, allowing owners to reduce their tax burden possibly.
“The significant increases in property taxes are a primary headwind that multifamily investors face. It has become such a problem that it’s even deterring some multifamily owners from further investment of capital.” — Mark Allen, D Magazine