Chicago’s commercial ‘doom-loop’ could result in a property tax hike on homeowners as large as 22% – Wirepoints

40

 Facebook Twitter Linkedin Email Print

By: Ted Dabrowski and John Klingner

The potential of Chicago entering a “doom loop” – that’s when “workers don’t return, offices remain empty, restaurants shutter, transit agencies go bankrupt, tax bases plummet, public services disappear” – is finally getting the attention it deserves. San Francisco is the canary in the coal mine, but Chicago has issues of its own, which we’ve written about here and here.

One part of the “doom loop” deserves special notice: the coming massive shift in property tax burdens from commercial to residential owners in Chicago. Only about half of Chicago’s office building space is occupied compared to just three years ago before the pandemic, according to swipe-card company Kastle Systems. Empty buildings means lower commercial property values and that, in turn, means lower property tax revenues for the city. 

Take the ugly case where commercial property values fall 50 percent and stay there for a few years, in line with Kastle’s estimated drop in occupancy (we detail our caveats below). Everything else equal, Chicago (the city and Chicago Public Schools) would be short some $670 million in annual tax revenues from those properties. And since Chicago officials are notorious for never cutting spending, count on them to hike taxes on residential properties to make up the tax revenue shortfall. 

The median residential home owner would see a property tax hike of 22 percent, or $891, under that scenario. Chicago’s median household paid $4,243 in property taxes in 2020 on a home valued at $275,000, according to the Lincoln Institute of Land Policy. That would jump to $5,134 based on the above assumptions. 

Wirepoints’ analysis contains the following caveats:

  • How much and for how long Chicago’s office market remains impacted by work from home (WFH) and other factors such as crime is highly uncertain. A recent analysis published in NBER calculates NYC office values will be 39 percent lower in 2029 than in 2019 as a result of WFH. It also found NYC office valuations could be down by 59.6% in 2029 if the work-from-home ‘state’ lasts a full decade.
  • The impact on the residential sector depends on how much of any commercial revenue shortfalls are shifted to residential properties. A full shift to homeowners may not be practically or politically feasible. Instead, other forms of tax hikes could be targeted, as could deep service cuts.
  • The city’s commercial landscape varies widely across the city. For our analysis, we’ve assumed that only the three townships (North Chicago, South Chicago and West Chicago) that contain a portion of the downtown, referred to by the Cook County Assessor as the “central business district,” will suffer a 50 percent drop in commercial property values.
  • For simplicity’s sake, we assume that any drop in office occupancy will result in a proportional drop in downtown commercial values and, hence, property tax revenues for the city. A less drastic 30 percent drop in Chicago commercial values would result in a $405 million loss in commercial tax revenues. A full shift in the burden to residential properties would result in a 13 percent tax hike.
  • Again for simplicity, Wirepoints used 2020 Illinois Department of Revenue data for the City of Chicago and Chicago Public Schools to calculate the potential tax increase on homeowners. The vast majority of property taxes Chicagoans pay are imposed by the city and CPS.

An empty Loop means higher taxes on Chicago homeowners

Wirepoints has already documented the emptying out of Chicago’s prime commercial spaces. For more detail, check out:

In short, about 80% of Chicago’s downtown office space is currently leased. But with actual occupancy running at about 50 percent of what it was in March 2020, tenants are unlikely to re-up for as much space as they have under their current lease. Chicago’s commercial values will, barring a renewed optimism in big cities, drop significantly once that fact filters through the city’s property market and tax assessment process.

The actual decline in commercial value is impossible to know right now, but we can estimate the tax impact on residents if we assume Chicago’s downtown suffers a decline in value equal to Kastle Systems’ occupancy data.

Chicago’s central business district is located in Chicago’s North Chicago, South Chicago, and West Chicago Townships. Those three areas combined contain nearly 75 percent of all commercial property value in the city. 

If the central business district suffers a 50 percent decline, total commercial property taxes paid to the city of Chicago and CPS would fall by $680 million – to just over $1.1 billion from $1.8 billion.

That means homeowners will experience a $680 million tax hike because they’ll be forced to make up whatever taxes commercial properties don’t pay. (Industrial and other properties only pay 3 percent of the total levy, so we exclude them for simplicity’s sake.)

In total, that means a 22 percent hike on residential properties, with the levy growing to $3.7 billion from $3.1 billion. 

That shift also means residential owners will be responsible for paying 75 percent of city and school district property taxes in Chicago, up from 61 percent in 2020.

The Windy City’s Future

San Francisco’s collapsed real-estate market, out-of-control crime, store closings, population losses and business relocations is an example of the doom-loop in action. The WSJ article “Fire Sale: $300 Million San Francisco Office Tower, Mostly Empty. Open to Offers” is emblematic of the city’s dire state.

Before the pandemic, San Francisco’s California Street was home to some of the world’s most valuable commercial real estate. The corridor runs through the heart of the city’s financial district and is lined with offices for banks and other companies that help fuel the global tech economy.

One building, a 22-story glass and stone tower at 350 California Street, was worth around $300 million in 2019, according to office broker estimates. That building now is for sale, with bids due soon. They are expected to come in at about $60 million, commercial real-estate brokers say. That’s an 80% decline in value in just four years.

This is how dire things have become in San Francisco, an extreme form of a challenge nationwide. Nearly every large U.S. city is struggling, to some degree, with reduced office-worker turnout since the pandemic spurred remote work. No market was hit harder than San Francisco, for reasons including its high costs, reliance on a tech industry quick to embrace hybrid work, and quality-of-life issues such as crime and homelessness.

Nobody is claiming Chicago is as far along, but the Windy City is beset by many of the same crises: 

There’s not much new mayor Brandon Johnson can do directly to dramatically reduce the impact from work-from-home, but failing to address the problems above, or worse exacerbate them, ensures the city’s commercial sector will continue to struggle and homeowners will get hit with tax increases they simply can’t afford. The doom loop will continue.

RELATED ARTICLESMORE FROM AUTHOR