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The Office Sector Shake-Up: What High Vacancy Rates Mean for Your Property Taxes
The office real estate market is undergoing its most significant transformation in decades. The rise of remote work, corporate downsizing, and shifting tenant demands have left many office properties across Texas struggling with high vacancies and declining rents. Yet, appraisal districts continue to assess these properties using outdated assumptions, resulting in inflated valuations—and higher property tax bills.
As a commercial office property owner, understanding these challenges and taking proactive steps to appeal your valuation could result in significant tax savings.
High Vacancy Rates: A New Reality for Office Properties
The days of stable occupancy and predictable rent growth for office buildings are gone, particularly in post-pandemic markets. Texas cities like Houston, Dallas-Fort Worth (DFW), and Austin are grappling with persistently high office vacancy rates.
Current State of the Office Market:
- Houston: Vacancy rates have exceeded 25%, with Class B and C properties suffering the most. Older office buildings struggle to attract tenants without costly upgrades.
- Dallas-Fort Worth: Despite being one of the largest office markets in the U.S., DFW faces rising vacancies, hovering at 22-23% in some submarkets. Tenants are consolidating into smaller, modern spaces, leaving older buildings with increasing vacancies and reduced rental income.
- Austin: Once a booming tech-driven market, Austin’s office sector has seen a slowdown. High construction activity has added millions of square feet of new supply, intensifying competition for tenants.
Key Challenge: Appraisal districts often assess office properties as if they are fully leased at market rents, ignoring high vacancy rates, tenant concessions, and declining income—creating a significant mismatch between valuation and reality.
How High Vacancy Rates Impact Your Property Value
Vacancy is one of the most critical factors in determining a property’s income and, therefore, its value. When vacancy increases:
- Net Operating Income (NOI) Declines: Fewer tenants mean less rental revenue to offset operating costs like maintenance, property insurance, and taxes.
- Tenant Concessions Increase: To attract and retain tenants, many owners offer free rent periods, improvement allowances, or other incentives that reduce effective rents.
- Higher Cap Rates Lower Valuations: Investors demand higher returns (cap rates) for riskier assets, such as office buildings with high vacancy. This reduces overall market value.
Example: An office tower in downtown Houston with 40% vacancy was valued as though it were fully leased, based on assumptions of $30 per square foot in rental income. After documenting actual vacancy data, tenant concessions, and reduced NOI, the owner successfully reduced the assessed value by 18%, saving $100,000 in annual property taxes.
Key Factors That Can Support Your Office Property Tax Appeal
To challenge an inflated assessment, office property owners need to provide property-specific evidence that reflects current performance and market realities. Here’s what matters most:
- Vacancy and Occupancy Data Document current vacancy rates and compare them to the broader market. Provide proof of ongoing lease rollovers, tenant departures, or difficulties securing new leases.
- Reduced Rental Income Include rent rolls that highlight actual lease terms, rent concessions, and declining rental income. Demonstrate how the property’s effective rent differs from market rents used by the appraisal district.
- Operating Expenses Rising expenses for tenant improvements, property management, and deferred maintenance further impact NOI. Include detailed expense reports to build your case.
- Market Comparables (Sales and Leasing) Highlight comparable properties with similar challenges (age, location, and condition) that sold at lower valuations or offered substantial concessions to tenants. Address any oversupply issues or competing developments in your submarket that impact demand for your property.
The Flight to Quality: Why Older Office Properties are Struggling
Another critical factor driving high vacancy rates is the “flight to quality” trend. Tenants increasingly prefer modern, Class A office spaces with amenities like fitness centers, collaborative areas, and sustainable features. This has left many Class B and Class C properties in Texas struggling to compete:
- Higher Capital Costs: Older buildings require significant investment to upgrade HVAC systems, lobbies, and technology to meet tenant expectations.
- Obsolescence: Without upgrades, these properties are viewed as outdated and less desirable.
Pro Tip: Include evidence of capital improvement needs or functional obsolescence to argue for a lower property valuation.
Why Office Owners Must Act Now
With vacancy rates unlikely to recover quickly, it’s critical for office property owners to act now and challenge inflated valuations. Here’s why:
- Tax Savings Add Up: A successful appeal can result in tens—or hundreds—of thousands of dollars in savings annually.
- Fair Valuation Protects Your NOI: Overvalued assessments increase property taxes, eating into already pressured net operating income.
- The May Appeal Deadline is Firm: In Texas, failing to file by the appeal deadline means you lose your opportunity to correct the assessment for the year.
How FirstPointe Advisors Can Help Office Owners
At FirstPointe Advisors, we understand the unique challenges facing office property owners in Texas. Our team of property tax experts takes a comprehensive approach to:
- Analyze Your Property Performance: Reviewing NOI, vacancy data, lease terms, and operating expenses to build a compelling case.
- Leverage Market-Specific Insights: Providing data on submarket vacancy rates, cap rates, and sales comparables to demonstrate fair market value.
- Manage the Appeal Process: From initial filing to negotiating with appraisal districts and representing you before the Appraisal Review Board (ARB), we handle every step of the process.
Our proven strategies have helped office owners secure significant tax reductions, improving NOI and property profitability.
Take Control of Your Property Taxes
High vacancy rates and declining rental income should not result in overvalued assessments and excessive tax burdens. By proactively reviewing your office property’s valuation and working with expert consultants, you can ensure your assessment reflects reality—and secure substantial tax savings.
Garrett Cope, Senior Manager, Property Tax
Contact FirstPointe Advisors today for a complimentary property tax review and let us help you plan ahead for success.
James “Garrett” Cope
Senior Manager, Property Tax
FirstPointe Advisors, LLC
3201 Dallas Pkwy., Suite 200
Frisco, TX 75034
Main: 214.253.0056
info@first-pointe.com
