Texas Multifamily Property Cap Rates Continue to Rise; Assessed Values May Not Decrease

By: Brad Dickerson – Senior Manager, Real Estate

As Texas multifamily property owners and investors await their 2023 notices of value, commercial real estate market conditions are impacting forecasts and expectations. As a result of a higher cost of borrowing, the multifamily market in Texas has seen an increase in cap rates over the past year, indicating a higher level of perceived risk for investors. Despite this rise in cap rates decreasing property values, the assessed values issued by Texas appraisal districts in the coming months may not decrease to the same degree, if at all.

What are Cap Rates?

Texas appraisal districts commonly use the income capitalization approach, particularly on multifamily properties. Though it varies by county, many appraisal districts have been using cap rates in their multifamily income models that lag behind market cap rate trends. Exiting COVID, we saw multifamily cap rates compressing. While some appraisal districts incorporated those lower cap rates into their income models, many districts only partially decreased their cap rates. This resulted in cap rates being used that were higher than true market cap rates. However, with the recent uptick in market cap rates, it is possible that the cap rates used in the appraisal districts’ 2022 income models are now in line with market rates entering 2023, meaning no changes to the districts’ cap rates may be needed. If a property’s performance entering 2023 was the same as or better than it was entering 2022, a decrease in assessed value may not be seen despite worsening market conditions, potentially posing a threat to the bottom lines of many Texas multifamily property investors as confidence in the market continues to decline.

As H2 2022 and Q4 2022 cap rate studies are published, owners and appraisers alike will have a clearer understanding of what changes will be made to appraisal districts’ 2023 income models, if any are warranted at all. Decisions regarding cap rate changes will vary by county, as some appraisal districts may leave their rates as-is to match market, while others may make alterations to capture the market downturn. However, commercial real estate owners and investors of Texas multifamily properties are still at risk of receiving increased notices of value despite what cap rate trends and income model predictions may indicate. In the event of a significant year-over-year multifamily property value increase, the commercial real estate property tax consultants at Invoke Tax Partners strongly recommend partnership with an experienced Texas-based firm to navigate the complex assessment cycle.

It is not too early for Texas multifamily property owners and investors to prepare for their 2023 notices of value and the associated appeals that will play an integral role in property tax rates. Learn more about the Texas valuation and appeal cycle, and contact our Texas commercial property tax professionals here to begin preparation of your appeal strategies.