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Houston Office Vacancies Lead to Lawsuits

by Kenneth Graeber, Houston, August 2017

 

The slump in global oil prices has taken its toll on Houston office properties. More than a fifth of Houston’s office space is now vacant. The widespread vacancies significantly reduced office values, leaving properties grossly over-assessed for property tax purposes. The number of lawsuits continues to grow as owners work to manage their tax expense.

 

Double-Digit Vacancies

 

Office vacancy rates climbed to the highest level in more than two decades during the second quarter. The overall office vacancy rate jumped to 18.8% in the second quarter compared with 16.5% during the same period last year, according to Colliers International.

 

The Class A suburban vacancy rate was 21.4%, compared to a rate of 17.3% for the central business district.

 

Sublease Space

 

Houston leads the nation in office sublease space. More than 10.5 million square feet of offices are not being used by an original tenant.

 

The majority of the sublease space in the market now has a 1-3 year term remaining. Given current demand for space, certain properties could face default as the existing lease expires, further depressing the values of office properties.

 

A Trend Toward Litigation

 

In recent years, owners have not been able to resolve appeals in informal hearings or through formal Appraisal Review Board hearings. This resulted in the number of lawsuits growing from an average of 2,600 filed annually from 2010-2012, to more than 4,100 a year from 2014-2016. Successful lawsuits negatively impact taxing units and have resulted in refunds of an estimated $60 million in 2016. This year, refunds are projected to be significantly higher, adding to existing budget woes.

 

Tammy Betancourt, CEO and executive vice president of the Downtown Building Owners and Managers Association told the Houston Chronicle that the rise in lawsuits is a two-fold problem. It’s due to “unreasonable increases in value over a number of years, as well as the inability to find any middle ground through the Appraisal Review Board process” she said.

 

The cost of litigation incurred by the Harris County Appraisal District jumped from roughly $9.4 million in 2012 to $15.6 million in 2016. These costs, which are funded by the various Harris county taxing units including cities and schools, are ultimately passed on to taxpayers.