Colorado-Real-Estate-Journal_474481

August 6-19, 2025 - Page 31 www.crej.com I t seems nobody is talk- ing about the property tax bomb coming to almost every major city throughout Colora- do. What is causing the huge decrease in property tax rev- enue even though your indi- vidual property taxes have skyrocketed? Why will your property taxes continue to sky- rocket? I’m amazed that there hasn’t been a bigger emphasis on the financial cliffs that most major cities will soon face. Most cit- ies are heavily funded by property taxes and most importantly com- mercial property taxes . How will cities fund their budgets that have ballooned during COVID without this revenue? Regard- less of whether a city is per- forming better than its peers like Atlanta, there will still be a huge reset in property taxes. Why will there be such a huge reset in property tax collections for almost every city? First, let’s look at how commercial proper- ties are valued. For commercial properties, the key valuation is the income approach and a cap- italization rate (rate of return an investor requires). As interest rates have increased, so have cap rates, which means prices have decreased. n Commercial property values will continue falling. The chart reflects a hypotheti- cal analysis of what is occurring in the multi- family sector. Multifamily was trading at insanely low cap rates while at the same time banking on appreciating rents. As rents have stagnated or even declined in some markets and interest rates have basically doubled, many apartment deals no longer cash flow and are in trouble. The rise in cap rates is driving apartment values sub- stantially lower as there are bet- ter alternative investments. For example, why would someone buy an apartment at a 4% rate of return when they could buy a government bond with basi- cally no risk at 5% or 6%? The example here is of a good multifamily property that has declined due to the cap rates. Now think of many downtown areas that are heavily tilted toward office space and where vacancy is now almost 50% and cap rates have risen substantial- ly; this leads to 30%-70% reduc- tions in values, which means considerably less tax revenue. Let’s look at Denver, which has a large downtown office core, as an example. n Denver office vacancy exceeds 30% for first time since the 1990s. In 2019 office vacancy stood around 16%, lower than the national aver- age. Fast-forward and Denver office vacancy has almost dou- bled to over 30%. At the end of the third quar- ter, total office vacancy in the city’s core was 30.6%, accord- ing to CBRE. The real estate services firm said it’s the first time downtown total vacancy has hit 30% “in the post-2000 era.” A spokeswoman provided quarterly figures going back to 2006, which show vacancy was as low as 9.5% in early 2008 and during the Great Recession went only as high as 17.4%. A representative of JLL, another massive real estate ser- vices firm, confirmed that its own research also shows down- town Denver has hit the 30% mark. Note the 30% vacancy is an average across all office grades. CBRE’s research found that Class B and C office buildings are the drivers behind down- town’s rising vacancy, with those buildings collectively having vacancy of 35.5% at the end of the third quarter, up 2.8 percentage points year over year. n The property tax bomb heading for Denver County. The media seems to be grasp- ing onto the headline of huge increases in vacancy, but the real story is that there will be an even bigger drop in property tax revenue for Denver in 2026 (after the 2025 reassessment period). Remember, commer- cial properties pay about three times the residential property tax rates in Colorado. With office vacancies hitting 30%, the values of these proper- ties will plummet during the next assessment as the income generated is at a minimum 30% lower, which means the val- ues have dropped between 30% and 50% when coupled with higher Treasury rates. There are some properties that I would say are now worthless, mean- ing the value is zero or even a liability for the owner. Denver has a huge concentra- tion of large office buildings that are now worth substan- tially less than a few years ago, which will lead to an enormous drop in property tax revenue for the county of Denver. Now multiply what is happening in office to apartments, retail, etc., that are dependent on the downtown core office users and values across the board are sub- stantially lower. n Most major cities will follow the path of Denver. Denver is not an anomaly; the same scenarios are playing out in most cities throughout the country as businesses cut back on their office footprints and leave for the suburbs. Further- more, even in cities with good performing office sectors, the huge jump in cap rates due to much higher Treasury rates will substantially reduce values as shown in the apartment exam- ple above. n Summary. Most major cities throughout the country are sit- ting on an enormous property tax bomb that will need to be addressed Property tax bomb: Are you ready for skyrocketing taxes? Property Tax Glen Weinberg Owner, Fairview Commercial Lending Please see Weinberg, Page 46