Why commercial property tax risk is rising
Commercial real estate is undergoing a massive valuation reset driven by high interest rates, vacancy shifts, and remote work. Because tax assessments lag behind these falling values, property tax risk is escalating. Compounded by a fragmented web of 95,000 taxing agencies, managing this risk is shifting from an operational task to a core portfolio strategy. Lenders and servicers must leverage data-enabled technology and monitoring tools to spot distress early and protect assets.
Commercial property tax risk is becoming harder to predict and harder to contain. Across the commercial real estate market, falling property values, shifting property use, and growing financial pressure are exposing weaknesses in how taxes are monitored and managed. At the same time, lenders, servicers and investors are facing greater pressure to identify early signs of distress, improve portfolio visibility, and avoid costly surprises tied to tax delinquencies and outdated assessments. What was once treated primarily as an operational function is increasingly becoming a portfolio risk management priority.
Commercial property tax risk is driven by multiple factors
Increased risk in the CRE space is driven by a combination of high interest rates, high vacancy rates, shifting work habits and changes in how commercial spaces are being used. Hybrid and remote work patterns continue to put downward pressure on the office sector, and online retail activity continues to be a headwind for physical retail spaces. Uses for other property types like industrial and warehouse are shifting or being redeveloped for things like data centers and cold storage, demand for which has recently escalated.
As a result of these changes, commercial real estate is undergoing a massive valuation reset, especially in the office sector, and in particular, with Class B and C properties. In some markets, buildings are selling for as much as 50% to more than 90% below their previous purchase prices. In Manhattan, for example, a 23-floor office building recently sold at a 97.5% discount from its 2006 price; and in Denver, a developer paid only $5.3 million for the Denver Energy Center after a foreclosure process, a steep discount from the $176 million price tag in 2013.
When values for commercial properties change, assessments will follow, but typically not right away so tax bills often reflect previous values. This lag can be a huge risk factor for asset stability and portfolio performance.
Complexity is compounding the risk
Beyond these challenges, the fragmented taxing authority environment adds to the risk. There are more than 22,000 taxing authorities across the country, but when you add all of the lower-tier agencies that collect taxes (think school districts, water and sewage, for example) that number swells to about 95,000. Each has its own approach to conducting assessments, processing payments and handling refunds and reporting.
For commercial portfolios, this complex web of taxing agencies, and the many differences in how they operate, is magnified at scale. Even a loan for a single property can span multiple parcels and/or tax jurisdictions, each with its own tax requirements, payment schedules, and risk for penalties or delinquencies. These multiple touch points increase risk by introducing the opportunity for more errors and missed payments.
Monitoring and visibility are becoming key risk strategies
Historically, most lenders and servicers have been focused primarily on current tax payment execution. Failing to pay taxes is often an early indicator of future distress, so there is a growing need among servicers, banks holding these loans and CMBS investors to confirm that taxes are being paid and that no delinquencies are developing that could put the underlying asset at risk. As a result, they’re looking for more ongoing monitoring, visibility and verification.
Solutions like the Cotality™ Commercial Tax Portal support this demand by centralizing tax servicing across agencies, standardizing workflows, and providing timely alerts and insights into portfolio performance.
Instead of simply managing tax payments, lenders, owners and servicers can proactively identify risk and act on it before it escalates. Additional tools, like the tax refund tracker within the Cotality Commercial Tax Portal, provide greater visibility not only into expected tax refund amounts, but also into the status and timing of refunds.
AI is promoting greater urgency for accurate data and infrastructure
The need for more ongoing visibility and monitoring is being accelerated by the broader push into AI. Many in the industry have been reluctant to dive head first into new technology and AI adoption, but the increased risk in commercial property taxes has made the stakes higher and the urgency greater. The reality, however, is that integrating AI technology effectively requires accurate, integrated data. Without this foundation, advanced risk management technology and tools have limited ROI. This has created an inflection point and impetus to shore up data accessibility, transparency and connectivity.
The CRE industry is realizing the critical importance of portfolio risk management as a core strategy and discovering just how easy it is with data-enabled technology and tools.
