CRE N Illinois

CRE taxes hit west side of downtown Chicago hardest

CRE taxes hit west side of downtown Chicago hardest,ph1

Mid-April may be tax season here in the U.S., but for owners and occupiers of CRE properties, taxes are never far from mind. While Chicago’s real estate taxes have risen drastically over the past five years, the largest burden has followed downtown demand, out to the western submarkets.

According to new research by Cresa, Chicago’s River West neighborhood—bound by Grand, Halsted, the Eisenhower and Ashland—saw the largest increase. This follows the decrease in vacancy as demand for new buildings moves ever westward from the Loop to one of the hottest areas in the country, let alone Chicago: Fulton Market.

One of the biggest real estate challenges facing both occupiers and landlords in the city of Chicago is the dramatic rise in real estate taxes over the past five years. And while the rising real estate tax burden is particularly onerous for Chicago area properties, it is a state-wide problem.

Illinois currently ranks 7th highest in the United States for property taxes; real estate tax revenue has increased by at least 5 percent year-over-year since 2015, topping out at $14.4 billion in 2017, the last year when totals are available. Prior to that, taxes only increased 1 to 2 percent year over year.

Among counties, Cook County has the heftiest Illinois real estate taxes. In the past two years alone, commercial property in the city of Chicago has experienced increases of 9.3 percent in 2016 and 7.48 percent in 2017. Additionally, the north and south suburbs have seen increases of 6.41 percent and 8.20 percent, respectively.

The newly installed Cook County Assessor, Fritz Kaegi, has signaled his intent to make the county’s property valuation process more transparent, though this could shift the burden from residential to commercial properties. In addition, the state’s perpetual pension crisis and a larger revenue allocation for education could all lead to more burdensome real estate taxes for occupiers and owners alike.

Downtown breakdown

After collecting tax data from the past five years across a wide selection of buildings in each submarket, Cresa inspected the five major commercial office submarkets in the CBD: East Loop, Central Loop, West Loop, River North and River West.

The Central Loop, West Loop and River North have the highest average per-square-foot amounts for 2018 with all of them being over $7.50. While River North falls into the per-square-foot upper tranche as the other two submarkets, it only experienced a $1.03 per square foot increase over the same period, representing a 15 percent increase. These three markets comprise the “core” of the CBD, making their high tax amounts somewhat justifiable due to high valuations and occupancy rates.

The East Loop saw a 0 percent delta, based on the subject buildings. While taxes peaked at $7.39 per square foot in this submarket during the past five years, they are back down to $6.05 per square foot.

The exponential tax increase in the River West neighborhood is standout of the recent past, where limited 2018 tax data shortened the period for analysis down to four years. Taxes increased a staggering 241 percent from 2014 to 2017. However, when the dollar amount is compared to the other submarkets, it tells a different story.

Rates in 2014 in River West were only $1.07 per square foot. The Central Loop was the lowest of the other submarkets that year at $4.12 per square foot. To add further perspective to the situation, consider that the 241 percent increase brings the per-square-foot amount to $3.64 for 2017, a full $0.48 lower than the lowest total for the other submarkets during the five-year period.

This meteoric rise can be attributed to the recent demand for loft/tech-oriented space in the Fulton Market area of River West—an area that hip startups call home, as well as multinationals like McDonalds, Mondelez and Google. As developers have flocked to the area to construct new buildings to fill demand, higher property values and increased occupancy percentages have led to a spike in tax rates.

What does this mean for the future of tax rates in these submarkets? All signs point to increases across the board, with each one feeling the burden to a different degree. With development, investment sales and leasing all reaching some of the highest levels in history, landlords and occupiers will feel the burden of balancing a state budget with a growing deficit.

The West Loop and River West submarkets will likely feel this burden most drastically as new buildings begin to realize higher assessed values in addition to being fully occupied. River North will see this impact to a lesser degree as there are essentially no new buildings and vacancy has remained relatively unchanged.

The remaining submarkets, the Central and East Loop, will likely feel this impact the least as their vacancy rates increase and new construction remains nonexistent. All the submarkets have seen investment sales increase over the past two years, creating a wrinkle throughout the market that is hard to quantify with respect to average tax rates across the city.