Ironstone Group has been valuing and appealing real estate and personal property tax assessments since 1974. We have experienced several severe declines in real estate during this time. Over the past several years, primarily due to low interest rates, real estate valuations have increased and capitalization rates have subsequently seen historic lows. As a result of the sudden halt to the overall economy due to COVID-19 and the multitude of new government rules and regulations our team of valuation experts believe we are entering into another severe downturn in real estate values.
After the 2008-09 Great Financial Recession a large number of former single family property owners became renters in multi-family properties. This surge in renters led to higher rents and occupancy levels which coupled with historically low financing cost drove down capitalization rates to unprecedented levels. Over the past several years we have seen properties selling for sub-4% capitalization rates. Many of the financial modeling was being done with assumptions of aggressive continued annual rent increases and high occupancy assumptions. These low risk assumptions are no longer the case in this new higher risk investing environment.
The immediate impact of this severe downturn is having a devastating effect on retail and hotels valuations and will soon apply to all types of real estate over the next several months. Most of us living today have never experienced this type of health crisis coupled with the sudden collapse of the economy. With the stock market losing a third of its value almost overnight, businesses closed, unemployment numbers projected to be worse than the Great Depression we are entering into a “New Normal.” All of us are and will continue to be affected by these events for quite some time. Don’t anticipate a “V-shaped” recovery.
We certainly expect valuations for property tax assessments to decrease because of increased vacancies, lower effective rents and capitalization rates in many cases doubling from there previous historic low levels. The effects of the GFC in 2008-09 was muted by the efforts of the Federal Reserve, they will have a difficult time repeating that this time. The last time we saw a severe downturn to the extent we expect was the S&L crisis of the late 1980’s and the Resolution Trust Corp (RTC).
We see a significant decrease in the volume of sales transactions for both commercial and residential real estate. Due to the lack of sales transactions we see most weight being given to the Income Approach when appraising income producing property and much less to the Sales Comp Approach. As for residential properties the market is typically determined on the margin by the most recent two or three sales in a neighborhood. Much will be determined by what residential lenders and government imposed rules are put into place with an increase in foreclosures.
Ironstone Group’s team of property tax professionals will assist you in determining the correct assessment value for your properties and appeal to the assessor to reduce your assessments so they fairly reflect today’s market value.