The Associated Press reports that the service sector (retail, health-care, construction, etc…) took a nose drive in January and February. Additionally, the Sub-prime fallout continues, inflation is up, the dollar is weak and the stock market is sinking. I have been following these developments as they relate to commercial real estate for some time now. I have written that the Sub-prime Crisis was bleeding over into commercial real estate sector back in August 2007.  I believe most people see a recession either as looming or having arrived. If the economy continues to fall, commercial real estate owners will loose tenants, rental rates will fall and new construction will be postponed. This will result in the lack of appreciation in real estate values and more likely will result in the loss of asset value.What have we seen thus far? We’ve seen in North Texas the number of transactions drop. We have seen owners place property’s on the market only to see them to take them off and wait for the things to get better. Additionally, we have seen new projects come on-line and not lease up as quickly as anticipated. Now, as I see it three things could happen:

1. Things could get better and values could continue to go up.  We believe the Boom is over and based on everything we’ve seen that doesn’t seem likely. I have heard experts tell me that we have gone from a seller’s market to a buyer’s market now a lender’s market.  2. There could be a period of no growth in real estate value. This seems likely if the economy in general does get worse here in North Texas. 3. We could see real estate values go down. This is possible; however we have not seen a large number of foreclosures which typically occurs when we see values drop.What about those who tell us things are fine? It is always important to filter your information. If real estate broker’s put out information about the market remaining strong you should question their motive. If they are in the business of selling real estate they will paint a picture that benefits them. Further, lenders only make money when they make loans. Don’t look for them to admit that their loans have lost value. The list goes on but the important point is understanding your source of information and do they have a biases.

If we begin to see little or no appreciation and/ or loss of value in commercial real estate we should see appraisal district valuations begin to level off and drop.   In tax year 2008 we should see the days of tax double digit increases on county tax  rolls end.  On the surface this projected trend should indicate lower taxes for for commercial property owners.  The problem that will arise will be the counties, cities and schools will raise their tax rates to compensate for the probable lower commercial and residential values.

The solution for commercial property taxpayers will be aggressively pursue their property tax appeals.  In the Boom years taxpayers were attempting to limit their taxes on assets which were appreciating.  Now property tax appeals will be all about real property tax relief to lower operating expenses now that the boom is over.