With the ongoing pandemic throwing nearly every aspect of our lives into uncertainty, you may be wondering what to expect in terms of property valuation. When it comes to assessed value vs market value, you’ll likely notice a discrepancy for the next couple of years. Let’s explore why.
Defining Assessed Value vs Market Value
Realtor.com provides a great breakdown of how market value and assessed values differ, as well as how they relate to one another. Here are the highlights:
Market value is the amount that you would expect to receive if you were to put your property up for sale right now. Real estate agents are the experts in market value. They’re the ones who analyze factors including building size, amenities, quality, location, etc., compare everything to similar, recently-sold properties in the area, and determine market value from there. And it’s important to note that market value can be strongly influenced by supply and demand. If there are a lot of buyers and fewer properties, the market value can be expected to go up, and if there aren’t many buyers but plenty of properties, the market value will drop.
Assessed value is the value of a property that is used to levy taxes and is determined not by a realtor, but by a county assessor. Like a real estate agent, a county assessor will look at comps (the amount that similar properties have sold for), but they will also factor in additional characteristics the value of any improvements made to the property, any rental income that is being generated from the property, the cost of replacement, and so on. Once they’ve arrived at the property’s total value, they will multiply that number by the local assessment rate (can range from 10% to 100% based on state laws) to determine the taxable value of the property.
What to Expect During a Recession
We know that a property’s assessed value and market value will be different, but when market value drops and your company is looking to cut costs due to a recession, it can be frustrating to navigate the stark differences in the two values.
To a certain extent, we can look at past recessions for insights into what to expect for assessed value vs market value over the next couple of years. During the Great Recession, for instance, we saw properties’ assessed value lag market value by roughly 2 years. This was especially true for the housing market. (Read our detailed breakdown of how the Great Recession compares to our current recession.)
One crucial difference between the Great Recession and the current COVID-19 recession is that businesses are being hit the hardest this time around, not homeowners. During the Great Recession, homeowners had to face increasing assessed values while the market value of their homes fell. Now, we may see businesses facing the same struggle as we head into 2021-2022. Even for businesses like hotels that are facing dramatic declines in occupancy and revenue, property tax assessments may remain at pre-pandemic levels, putting those companies in a bind. You can learn more about why assessed values lag market conditions.
Changes in Market Value So Far
So, what changes have we seen in market value since COVID-19 hit the US? EY reports that real estate professionals expect property values for lodging, tourism, gaming, and retail industries to significantly decrease. They also anticipate decreases for developments in progress, office buildings, and apartments/student housing. But single-family homes, industrial property, and health care are expected to remain about the same.
Similarly, Nareit’s Quarterly REIT Performance Data for Q2 shows negative returns for all sectors except industrial, data centers, and infrastructure (all three are strongly tied to e-commerce, which has remained insulated from the impact of social distancing measures).
Green Street Advisors Commercial Property Price Index reports an average 10% decline in commercial property values (though they note that this is an oversimplification and should only be used as a general rule of thumb). Values fell anywhere from 5-25%, depending on the property type in question. Property values fell just after the pandemic hit in the US (in March and April) but have remained relatively steady since then.
How Should Property Tax Professionals Prepare?
The bottom line is that you shouldn’t expect assessors to lower your values in 2021 due to the pandemic. If you believe that your property value should be lowered, be prepared to appeal. With that in mind, do what you can to prep for next year’s appeals. And certainly be more diligent and judicious in your 2021 budgeting to account for the ongoing uncertainty of COVID-19 conditions.
For more detailed insight into COVID-19’s impact on property tax, watch our free, on-demand webinar with PTX CEO Stephen Wicks.