photo by: Nick Krug/Journal-World Photo

Downtown Lawrence is pictured in this aerial photo from December 2017.

Rising property values are sure to create some higher property tax bills in Douglas County this year. But one group is less likely than others to see them: owners of buildings that house restaurants, bars, storefronts, offices and other commercial property.

Commercial property values in Lawrence and Douglas County have taken their largest decline in decades, according to new estimates from the county appraiser’s office. County Appraiser Steven Miles is now estimating that commercial property values will fall by 5.3% compared with values a year ago.

The Journal-World reviewed data going back to 2004, and this year’s increase stands as the largest during that time period. In fact, it is not even close. The largest previous decline was a 1.3% drop during an economic downturn in 2013.

But it makes sense this would be the year for it to happen. The declines are driven by the pandemic, Miles said.

“You are seeing more buildings sit vacant, or you are seeing landlords cut the rent in order to keep a business in the space,” Miles said.

Those are important factors because the tax value of commercial property often is determined, in part, by looking at how much money the property is generating in rent. While businesses themselves have been getting assistance from federal programs ranging from the CARES Act to the American Rescue Plan, commercial landlords haven’t often received such direct assistance. Instead, the theory has gone that federal assistance given to business owners will trickle down to commercial landlords because that federal assistance will help those businesses stay current on rent payments.

That has happened in some cases, but hasn’t in many others.

“There are certainly businesses that have closed and left with a lot of back rent unpaid,” Miles said. “For the (landlords) it was a little bit rougher this year.”

By one estimate, the pandemic has had about a $70 million impact on commercial real estate in Lawrence and Douglas County. Miles’ latest estimates, which will become final next month, peg the fair market value of commercial real estate in the county at about $1.32 billion. That’s down from $1.39 billion in 2020.

Not all businesses, of course, were hit equally as hard. The ones hit the hardest are the ones you would expect during the pandemic: hotels, restaurants, bars, music venues, theaters and other buildings that housed entertainment businesses. Miles said that means many downtown property owners likely will see reduced values this tax season, which runs counter to the historic trend of rising property values and rising taxes in the downtown district.

“So many of those businesses in downtown rely on entertainment and people,” Miles said. “Those are the businesses that have really been hurt.”

Miles said other types of commercial property have fared better. He said manufacturing space, warehouses and other industrial properties have had strong values, while office space has seen some negative turns in value, but not to the degree of retail and entertainment space.

It will be interesting to watch whether commercial values in other Kansas counties see a similar decline, or whether Lawrence’s commercial scene was harder hit because of a greater reliance on entertainment and tourism-related business. Property value estimates are being compiled in other counties currently and won’t be finalized until May at the earliest. But I did see one early estimate from the Shawnee County appraiser’s office that indicated commercial property values are set to increase by 2.7% there. If both the Shawnee and Douglas County estimates hold, that will be a significant difference in how commercial property values have reacted to the pandemic in neighboring counties.

But the bigger question may be: What happens next? Since the pandemic fueled this downturn, should property owners expect a spike in property values once the pandemic abates? Miles said such a spike was far from certain.

“I, of course, can’t say what will happen in the future, but my personal feeling is I don’t think it will take a drastic jump because it seems like it is a slower recovery here, and some things have changed,” Miles said. “There is going to be a shift in the needs of offices, retail and that sort of thing.”

If those shifts create less demand for commercial space, then commercial property values may remain depressed for a while. That will be a big issue for Lawrence and one that should get the attention of not only commercial property owners. Homeowners also have skin in this game.

Why’s that? Douglas County governments — everybody from city commissions to school boards — rely on these property values to determine how much money they can raise from property taxes. If property values decline, and governments want the same or more money in property taxes, then the property tax rate charged to every property owner goes up.

When commercial property values go down, that means other types of property owners pay a greater share of the total property taxes collected in the county. In Douglas County’s case, the type of property owners who would pay more are homeowners.

The numbers show that in 2020 residential property — which includes apartment complexes in addition to homes — made up about 68% of the county’s basic tax base. In 2021 — largely because of the decline in commercial values — residential property will make up more than 70% of the county’s basic tax base.

If the estimates hold, 2020 will be the second year in a row that commercial property values have declined. The decline in 2020 was only about 0.2%, but the fact that we’re seeing back-to-back declines is significant. It is unclear when that last happened, but it had never occurred dating back to 2004, which is the time period for which statistics were easily available. The only other years where the county posted declines in commercial values during that time period were 2013 at 1.3% decline and 2010 with a 0.4% decline.

Miles’ report also provided estimates for other types of property values in the county. As we’ve reported, residential property values continue to rise, and the latest report shows that again. Here’s a look:

• Residential: up 5.5%

• Farmstead: down 6.6%

• Vacant land: down 7.6%

• Agricultural land: up 1.9%

Overall, Miles is now estimating the taxable value of Douglas County property to come in at $1.43 billion, which would be an increase of 2.7% compared with a year ago. That 2.7% estimate is lower than previous estimates Miles had created, largely because work to determine commercial values is now further along than when the estimates were previously generated.