Struggling Downtown Chicago Real Estate Market Complicates Property Valuations. The downtown Chicago real estate market continues to face challenges, making it difficult for officials to determine property values in the first property tax assessment since the end of the pandemic. The stagnant market has seen minimal transactions, with less than five large office buildings changing hands last year. Unfortunately, these limited deals have sold at significant losses, ranging from 50% to 90%, according to the Building Owners and Managers Association of Chicago. Such distressed sales are creating hurdles for price discovery, leading Cook County Assessor Fritz Kaegi to consider omitting these transactions from his calculations.
However, excluding distressed sales can have far-reaching implications. The value of properties in Chicago's downtown area plays a central role in determining the tax burden shared by residents and businesses. If Kaegi excludes distressed sales, it could result in other building or residential owners facing higher taxes at a time when they are still recovering from the impact of the pandemic.
Given the city's history of soaring property taxes, the valuation of the commercial district carries significant weight. Critics argue that despite the challenging market conditions caused by the pandemic, Kaegi has previously shifted more property tax burden onto commercial properties. Thus, it remains uncertain whether he will acknowledge the drastic drop in downtown office building values. This situation has gained attention and concern, especially as high-profile residents and businesses, like billionaire Ken Griffin and his hedge fund Citadel, have opted to relocate to other cities with more favorable tax environments, such as Miami.
Chicago's commercial property struggles reflect a broader trend impacting lenders globally. Lenders have been grappling with losses on distressed property loans, particularly in the office sector. Recent sales have further increased the risk as lenders and owners may now face valuations that have significantly changed since interest rates began to rise in 2022.
The impact of these challenges goes beyond the commercial property sector. Chicago's downtown vacancy rates stood at 23.5% at the end of last year, far from the pre-COVID-19 level of 13.1% in 2019, according to Cushman & Wakefield Plc. Excluding market factors from property assessments could further hamper recovery efforts, affecting the central business district, neighborhood commercial corridors, and small businesses citywide. The Chicagoland Chamber of Commerce warns that a notable shift in property tax burden to homeowners across the city may occur if large office buildings are assessed fairly.
Cook County Assessor Fritz Kaegi acknowledges the impact of the pandemic on the market, noting that vacancies of 20% or more were already factored into assessments in 2021. He expects that additional vacancy rates will be baked into the assessments due to recent developments. However, he also highlights that newer trophy buildings have fared better, and Chicago's return-to-office rates surpass those on the coasts, lagging only behind the major cities in Texas.
The tax burden issue extends to homeowners as well as building owners, who have experienced years of consecutive property tax increases. The total assessed property value has increased by 31% to $47 billion since 2018, primarily driven by non-residential properties, according to the Cook County Assessor's website. Property valuations are critical for budgeting purposes, enabling cities like Chicago and others such as New York City and San Francisco to rely on tax levies from the expanding commercial real estate sector to fund vital services like schools and public safety. In Chicago, property taxes also contribute significantly to severely underfunded pensions.
To navigate these challenging circumstances, Kaegi's office plans to consult with brokers, owners, and tenants seeking leases, as well as analyze data on vacancies, rents, cost ratios, and sale prices. The property assessments, conducted every three years in Chicago, are expected to be released later this year. With differing expectations between buyers and sellers in the current market, determining the true value of buildings poses a conundrum that officials must carefully navigate.