Published Expert Article
– by Charlie Mitelhaus
Associate Advisor at Pinnacle Real Estate Advisors

Statewide, the county appraisal districts seem far removed from the fact that commercial property values have deteriorated as the cost of capital has increased over the last year. On March 16^th, 2022, the United States Federal Reserve initiated one of history’s most aggressive rate hiking expeditions. If Mt. Everest was the figurative goal, the Fed had just departed base camp for its ascent. It was at this point that it seemed as if the tsunami-size wave of apartment investment demand started to crest. As interest rates rose, capital placement and investor interest in commercial real estate waned due to market volatility. Subsequently, capitalization rates expanded and property values diminished.

Apartment rent growth went from year-over-year, double-digit percentage rent increases to now, for some owners, just struggling to maintain current rents and in some instances even reducing rents and making sharp concessions to keep occupancy levels high and vacancy low. All this in the midst of an estimated 100,000 additional units projected to be delivered in Denver from 2023 to 2030, which would be the fastest incremental addition of 100,000 units in Denver’s history.

With revenue growth decelerating, apartment owners are not getting any abatement on expenses. Expenses like contract services, utilities, insurance, repairs and maintenance, payroll, and advertising/marketing continue to face excruciating increases. With those expenses seemingly having no horizon in sight, property taxes might be the most talked about expense item across the board. Apartment owners state-wide gulped and pulled at their collars in a vicious sweat this spring when reviewing their recent notice of valuations. Four words when it comes to property taxes for apartment owners in Colorado; they are going up.

Both property taxes and insurance have seen double-digit percentage increases over the last few years and 2023 was no exception. Insurance premiums specifically have increased substantially. However, as 2023 was an assessment year (odd-numbered years in the state of Colorado), the topic on most investor’s minds lately has been property taxes. Apartment owners are compelled to spend hard earned money and valuable time to protest their proposed values year after year, sometimes employing the likes of property tax consultants, other times by themselves. The significant rise in property taxes is a main headwind that apartment owners face. On top of the landlord licensing requirements, owning multifamily in Denver is not becoming easier as time goes on. This has become such an issue that it has even turned off some apartment investors from continuing to invest in Denver and Colorado.

According to 9News, all nine Denver metro area counties saw property valuations get hit with double digit increases in their biannual assessment. Douglas County saw the largest median residential increase at 47%. The lowest being 33% in Denver County. The Denver metro area also includes Adams County (38% increase), Arapahoe County (42% increase), Boulder County (35% increase), Broomfield County (41% increase), Elbert County (35% increase), Jefferson County (36.5% increase), and Larimer County (40% increase).

The Colorado commercial real estate market has been able to create and foster long-lasting generational wealth for many over the years. It has survived downturns, recessions, supply-chain issues, political unrest and even a pandemic. As multifamily owners in the past have been able to not just survive, but find ways to thrive through it all, it goes without saying that the Colorado’s widespread increase to their property taxes is another drop in the bucket of headwinds that owners and investors alike are now facing in conjunction with everything else that goes into being a landlord in Colorado and Denver specifically.

All in all, apartment owners, state and local leaders, and real estate professionals alike must work together to find innovative solutions. Colorado Governor Jared Polis and state legislators announced plans earlier this year that they said would help ease property tax increases. According to 9News, legislators stated the proposal would protect funding for schools and use TABOR surpluses to backfill revenues for fire and water districts, and for hospital and ambulance districts not growing as fast. Through a collaborative effort, we can help ensure all stakeholders can benefit from an equitable and fair tax system that supports infrastructure and schools simultaneously promoting long-term stability and growth.

Let’s turn headwinds into tailwinds.

Together.

Featured in CREJ’s August 2023 Multifamily Properties Quarterly