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Total Sales of Commercial Buildings in Chicago Plummet From 2018 to 2019

Sales of commercial buildings located in Chicago declined from $16 billion in transactions in 2018 to $8.07 billion in 2019 per a study by Jones Lang LaSalle (JLL).  2019 was the worst year for the sales of commercial property which includes office, apartment, hotels, retail and industrial properties since 2013 when transactions totaled $7.55 billion.  The downturn in the Chicago market was not reflected in the U.S. as the national dollar sales volume increased 2.7% in commercial transactions in 2019, according to JLL.  Why for the dramatic downturn in Chicago commercial transactions?

Jim Costello, the Senior Vice President of Real Capital Analytics summed it up well by saying, “There was a lot of weakness because Chicago was exposed to property tax changes coming to Cook County, and all the uncertainty that comes with it.”  “Sales of Chicago commercial buildings plunged in 2019: ‘Everyone was asking me what’s wrong with Chicago,” by Ryan Ori, Chicago Tribune, February 21, 2020.

The downturn in the number of commercial transactions will lower real estate transfer tax collections of $95 million which is not good news for local taxing bodies.

A lot of the onus of this downturn could be placed on Cook County Assessor Kaegi’s substantial assessment increases for commercial properties in Cook County of an average of 74% in the northern suburbs which were the subject of Kaegi’s first triennial reassessment.  A Chicago Tribune analysis shows that if Kaegi’s initial property tax values had stood, businesses would pick up 44% of the combined taxes in those northern suburbs in 202 which is an increase from 34% this year.  As a result, these increased valuations and assessments would shift 10 percent of the property tax burden from homeowners to businesses.  This transfer of the tax burden has been reduced due to taxpayer assessment reductions at the Cook County Board of Review level.

There are other economic challenges facing Chicago commercial investors such as skyrocketing pension obligations, proposed changes to the tax increment financing (TIF), increased affordable housing requirements and rent control.  All of these factors are causing a cooling of the market and real estate investor’s attitudes of investing in Chicago.

“I think all this uncertainty is freezing investment, which is going to hurt developers, general contractors, building trades numbers,” said Jack Levin, President and CEO of the Greater Chicagoland Chamber of Commerce, who also pointed to a possible change in the graduated system for state income taxes and city real estate taxes, among other pressures on business.

“All this is going to slow down job growth, stunt expansion, stunt business growth.  And it’s not just downtown.  It’s in the neighborhoods too.  And so we really need to step back and look at this,” Lavin added. “Businesses hit hard by new property tax assessments in the suburbs – but homeowners could catch a break,” by Hal Dardick, Chicago Tribune, December 12, 2019.

An article in the Business Insider discussed the effects of the downturn in the Chicago market which discussed a Real Capital Analytics Study which shows that the prices of office buildings, retailers, hotels and apartments in Chicago fell 4.1% in the last year.  Real Capital Analytics used its data to determine that total commercial sales in Cook County declined by 42% in 2019.  Green Street Advisors’ managing director, Dave Bragg was quoted in this Business Insider article that “The primary reason that Chicago is struggling from an investment – sales perspective is the outlook of higher taxes in the future.” “The Chicago Real Estate Market is even worse than Hong Kong’s New Data Shows,” by Ben Winck, December 3, 2019.

Hopefully, 2020 brings an increase in commercial sales transactions and this trend gets reversed.  However, increased property taxes, increased pension liabilities and the negative economic ramifications from the Covid19 pandemic will make it very challenging to improve the outlook of the Chicago commercial real estate market.