The Real Deal Chicago

Chicago’s shaky finances could pose big threat to commercial real estate market

A new report shows Chicago has the worst fiscal health of any large city.
August 01, 2018 10:00AM

The Chicago skyline (Credit: iStock)

Chicago and Illinois are in a “fiscal death spiral” that could have severe consequences for the city’s booming commercial real estate industry.

Real estate research firm Green Street Advisors issued a report on the risks of investing in commercial property in markets plagued by financial woes, and the news is not good for Chicago, according to a report in Crain’s.

The firm has given the city the worst fiscal health score in the country, and the report said looming financial obligations like underfunded public pensions could make the cost of property investing much higher in the future.

The report said rising property taxes will continue to impact landlords’ bottom lines, and that the situation might get worse if Democrat J.B. Pritzker wins the gubernatorial race in November.

Less directly, the state’s fiscal mismanagement continues to cause residents and corporations to leave in droves — which reduces the demand for retail, office and residential space, the report said.

While developers and investors are likely aware of Illinois’ fiscal problems, the consequences of those problems is not being factored into property deals now, the report said.

“Fiscal health of states and municipalities is an inescapable threat that doesn’t appear to be priced in to property market cap rates, likely because there is much uncertainty over timing and outcomes,” the report said. “But knowing the train will eventually come off the rails should be enough, and market participants would be wise to incorporate this fact into their [pricing] models today.”

Despite a flood of commercial development and corporate relocations, Chicago-area property prices saw their first drop in five years at the end of 2017. That came even as the greater national market continued its upswing.

There are other local factors in play other than the state’s financial morass. The springtime defeat of Cook County Assessor Joe Berrios has big-time investors wondering what will happen with their property tax assessments.

Berrios’ office was accused of undervaluing large commercial properties such as the Willis Tower, which the county valued at $580 million for tax purposes when it sold for $1 billion.

In 2016, large office buildings in Chicago had a median property tax bill of $2.9 million, an increase of $500,000 per building since 2012. [Crain’s] — Joe Ward