There has been much reported about Philadelphia’s property reassessment for tax year 2023. In the spring of 2022 the Office of Property Assessment (OPA) announced that the completed reassessment raised the value of property in Philadelphia from $170 billion to $204 billion for 2023.
However the accuracy of the new assessments has been under question, especially in north, west, and southwest neighborhoods — which are the city’s poorest areas. This is a repeat of what was found in a 2019 study done by the Office the Controller. The Office also noted “little progress in improving assessments for single-family residential properties in these areas” and that the 2023 reassessment shows the largest increases in these areas.
Accurate assessments are the foundation on which a fair property tax system is built and every owner should pay an equal share of the property’s market value. Philadelphia has a flat tax rate for all properties and owners due to the state’s uniformity clause which prohibits different tax rates for different property types.
While news has focused on the impact on residential properties, inaccuracies in assessments also extend to commercial properties. As we continue to work with our clients to analyze and understand the new numbers we see some key trends emerging.
In general assessments are over projected for all types of commercial real estate. However there is no question that multifamily properties, from new construction to aged products, are taking the biggest hit when it comes to the higher assessments. In some cases the assessment is 30-40% higher than the actual market value. This general trend could be the result of the city trying to make up for lost revenue from wage and occupancy taxes. Even though Philadelphia does rely more on residential property and wage taxes than most major cities, the impact will still be felt.
Another trend we see is the non-materialization of the projected jolt in the office market. Although there has been an upward trend in office workers throughout 2022 per Placer.ai, the Center City District’s October report says office workers had returned to 57% of their September 2019 levels for an overall average of 75%. This was not the expected outcome after so many efforts were put into getting workers back into the city, especially after Labor Day.
Many experts believe that occupancy rates will never again reach pre-pandemic levels. This has profound implications for real estate markets, which are highly sensitive to changes in interest rates. In an effort to keep inflation under control, Federal Reserve officials have been hesitant to raise rates too quickly. However, this policy may only serve to delay an inevitable market correction. The implications of lower revaluations is significant, especially as current studies are saying occupancy rates will remain permanently lower than before March 2020.
Increasing interest rates and cap rate changes complicate matters even more for over-assessed properties. Higher cap rates generally carry more risk for owners, decreases in NOI, and increases in cash outlays. With higher interest rates added into the mix, owners have less ability to offset their risks through sales or re-financing. Lastly, with the market always on the move, the current market value of many properties is lower than when the assessments were done. Consequently there is a gap between the assessed values and the present day market value.