Property Taxes Put the Squeeze on Industrial

Vacancy and rental rates are two gates to gross profits in commercial real estate. But when it comes to net operating income, expenses are the third barrier. According to Savills, rising property taxes are putting the squeeze on owners and occupiers. In addition, they’re also limiting rents.

“While higher vacancy rates and stabilizing rents have offered some relief to tenants, property tax sticker shock is emerging as a new pain point for warehouse occupiers, who often reimburse expenses on triple-net leases,” they write.

The firm says that the industrial market is feeling particularly sharp pressure. Local governments have raised taxes in response to large jumps in property sale prices — up an average of 70.4% across 11 major markets in the U.S. and Canada during the last five years, compared to 4.3% for other CRE sectors — because property taxes are an important part of revenues. Again, on average, industrial properties have seen a 29.6% increase in assessments, with property taxes having grown by 21.3%.

Across those 11 markets, property taxes vary from $0.69 (Charlotte, NC with 15.0% tax growth) to $2.26 (Northern New Jersey, with 11.9% tax growth) per square foot. That accounts for between 6.9% to 19.3% of total occupancy costs. The other nine metros and their tax growth rates were Calgary, Alberta (24.9%); Montreal, Quebec (29.8%); Chicago, IL (9.2%); Toronto, Ontario (-3.6%); Greater Los Angeles, CA (19.8%); Dallas-Fort Worth, TX (13.7%); Houston, TX (32.6%); PA I-81/78 Corridor (26.7%); and Atlanta, GA (57.1%).

“Property taxes can be a significant expense, accounting for an average of 12.0% of a tenant’s total occupancy cost across the analyzed markets, reaching up to 19.5% in Chicago,” they wrote. “For example, a 500,000-square-foot building in Toronto, under current assessment and millage, may face a tax bill of around $1.1 million CAD, a figure that is expected to increase when province-wide reassessments resume.”

The inter-metro comparisons are not as clear as the numbers might suggest. California’s Proposition 13 limits assessed values to 2.0% unless the property is sold. Unsold properties considered there saw a five-year 10.0% increase, while sold properties saw average tax growth of 327.0%. New Jersey’s PILOT (Payment in Lieu of Taxes) programs provide lower-than-standard fixed-term payment incentives to promote development.

Toronto had negative tax growth because one of their approaches to the pandemic was to base 2023 and 2024 assessments on 2016 values.

And Will County, IL saw 45 million square feet of new industrial development that “increased the tax base enough to reduce millage rates.”

“Municipal taxing bodies continue to play catchup with market values, which have grown at more than double the pace,” Savills wrote. “This sets the stage for the risk of additional increases in assessments and even higher property taxes. It is important to understand that industrial properties are only a portion of a jurisdiction’s tax base, which also includes other major commercial real estate as well as single-family residential. The industrial sector has significantly outperformed other CRE types, with market value appreciation that has even outpaced the notable recent rise in home prices, which the Case-Shiller Index measures at 54% nationally over the last five years. This sustained bifurcation is driving a shifting share of the municipal tax burden onto industrial property.”