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QUESTION

Is there a flight to quality observed in the Department of Finance's real property tax data?

5:26:56

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Preston Niblack confirms a flight to quality trend in the office market according to real property tax income and expense data, with a preference for modern, high-end office spaces.

The market shows strong demand for high-end office spaces versus less demand for older buildings.
Real property tax data is based on reported income and expenditures from two years prior, reflecting calendar year 2022.
Assessments for property taxation are retrospective and do not predict future income and expenses.
The overall flat office sector in the tentative assessment roll mirrors the mixed market state and effects of COVID-19.
A significant investment upturn and equalization changes contributed to a 42% increase in market value in the office building sector.

Justin L. Brannan

5:26:56

Are you seeing this flight to quality in the real property tax income and expense data that DoF collects?

Preston Niblack

5:27:04

Yes.

5:27:04

It's clearly a mixed picture right now in the office market, very bifurcated, strong demand for high end office space with modern layouts technology, amenities and less so for older buildings with fewer amenities.

5:27:20

Two things to keep in mind regarding the tenant assessment role.

5:27:22

First, it's based on reported income and expenditures from essentially 2 years ago, so calendar year 2022.

5:27:30

And second, assessments for the purchase property taxation are retrospective.

5:27:35

While valuations in the market for purchases or financing of buildings, are forward looking and are projecting what is expected to be future income and expense rather than past income and expense.

5:27:48

So I think the fact that the office sector is relatively flat overall in the tentative assessment role compared to before the pandemic reflects both the mixed state of the market and the fact that in 2022 employees were still working from home and but employers were still paying the rents on their leases, which had yet to run out and expire.

5:28:11

Another factor that contributed to the increase in market values this year was a big upturn in investment.

5:28:18

There was actually accounted for in the office building sector 42% of the increase in market value from last year.

5:28:25

The rest was mostly equalization changes or changes in market conditions reflected in real property income and expense statements.

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Will the change in assessments between the tentative and final role differ from the typical 1% to 1.5% reductions this year?

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Have sales of higher-end homes slowed like mainstream home sales?