2024 DFW Multifamily Outlook: Part 2

In the next installment of our 2024 Dallas/Fort Worth multifamily outlook, we look at property taxes. A thorn in the side of owners over the last handful of years, county assessors have ridden the wave of cap rate compression and the increased value pool of sales comparables. We expect 2023 to be the high-water mark of property tax bills, as we explain below. There are two components to consider: the county’s assessed value, and the tax (millage) rate.

Component No. 1: County Assessed Values

Just like a commercial appraisal, multifamily properties are valued based on the income approach and/or the sales approach. Generally, the two approaches should yield similar results. 2023 assessed values were performed using 2022 market data and sales comparables, when the market was at its peak. Said another way, there is a one-year lag for changes in the market to impact a county’s assessment of a property’s value.

This chart visualizes the effect of 2022 data impacting this year’s tax values. Initial assessments increased ALX’s portfolio by 45%, though this was reduced to 18% via protests.

The input data for 2024, however, looks much different. Perhaps the best place to start is with sales comparables. Across all classes, sales price per unit is down over $20K/unit from last year, decreasing from $173K/unit to $153K/unit. It is also below the 2021 average price of $162K/unit. At a basic level, it will be difficult for counties to justify large increases because of recent sales.

Not surprisingly, the income approach does not fair much differently. Across 1,000+ recently surveyed properties, Net Operating Income has increased about 5.0% from the year prior.

At this growth, to hold its 2022 values, cap rates could only expand by approximately 25 basis points. Of course, actual cap rates have increased anywhere from 100 to 150 basis points, depending on the asset class. The income and sales comparable approaches both show that the 2023 data set is a sharp decrease from 2022, a sign of relief for owners.

Component No. 2: Tax (millage) Rates

Before 2023, tax rates averaged minimal annual declines which were helpful but not enough to keep pace with the increase in property values. That changed in 2023 because of the State of Texas’s decision to return part of its budget surplus to property owners. New 2023 rates declined steeply, nearly 11% in the cities and counties we surveyed (below).

Prior to this, the average annual decline was only 1.6%. Total tax revenue will not decline in 2023, to be sure, because of the increase in values. But it does set the stage for 2024 tax rates continuing to aid owners. Property tax consultants who have spoken with state legislators indicate that these reduced rates will last at least until the next session, which meets in 2025. Small increases may happen, certainly, but a jump commensurate with this year’s decline seems unlikely with today’s environment in mind.

Putting It All Together

While the two above components, in their current form, would point to a coming decline in property taxes, that is unlikely. Municipal and county governments will see some expansion in tax collection. County assessors know of the changing market conditions and the looming decline in their comp set and will be prepared to make sure valuations still allow for growing budgets. We do believe, though, the times of increases of 15%+ are over for the time being. We expect moderate increases in valuations, with millage rates to remain static or increase slightly.  

Not only will this help Net Operating Income, but it will also help escrows. Because of the large year-over-year increases of recent years, owners have had to “catch up” their escrow accounts to the new amounts, draining more cash each month. With smaller jumps, this will abate and free up additional cash.

The Final Call

DFW property taxes expense increases should be in the range of 2–4% in 2024. Protests and litigation may drive this down further. A 5% increase would be our ceiling expectation today. Remember, at a 50% expense ratio, a property with 5% revenue growth and 5% expense growth will still increase NOI by 5%. There is a real opportunity for NOI to accelerate further in 2024 if revenue growth outpaces expense growth, giving owners an optimistic outlook entering 2025.

*Special thanks to Austin Federer and Hilltop Property Tax for providing the historical tax rate data above.

Patrick Dunne
Leads property underwriting, economic analysis, debt structuring, and investment management.
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