Wednesday, December 11th, 2019 December11th2019

Sell for More News: Investors have soured on Chicago…this is why

Published on December 11th, 2019

Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.

 

Chicago area commercial property sales fell 33% in the first nine months of 2019…by far the worst drop in the US.  Why?  Over taxation…and no hope that the situation will improve.  Some experts are even using the term “fiscal death spiral.”

I’ve worked in the Chicago market since 2006…and I can assure you that the situation has never been more dire.

Higher property tax rates plus higher assessed values

For example, we’re marketing for sale a very nice, well located industrial property.  We’re asking $1.5M and are receiving little interest. Located in northern Cook County, the county assessor recently re-assessed the property at $3.5M.

We spent a lot of time trying to translate that new assessed value into the next property tax bill…a calculation that is intentionally confusing and not market based…and eventually determined the tax bill for the property (market value of $1.5M or less, remember) would be $128,000 per year.

Would you buy a commercial property for your business if it meant paying $128,000 a year to the government for the privilege? Most won’t which is why there are 10 times more sellers than buyers in the Chicago marketplace today.

Insurmountable unfunded liabilities

Keep in mind, the City of Chicago’s unfunded pension liabilities alone total $42B.  The state of Illinois’ unfunded pension liabilities are a cool $133B.

Both are desperate for more revenue which led to the upcoming legalization of recreational marijuana, sports gambling and the opening of six new casinos.  Most business owners I’ve spoken with don’t believe these changes will be helpful to them.

So it’s not a stretch to see why commercial real estate investors are struggling to come to grips with future tax liabilities at the state and local level.

And let’s not forget the strangle hold unions have long had on the City of Chicago which has prevented many businesses from opening there in the first place…especially hotels.

The data tells the story

As stated, commercial property sales in the Chicago area fell 33% from the prior year…the biggest drop among the top 25 U.S. markets.  And much larger than the 6% decline for the nation overall.

A combination of unfunded pension liabilities, uncompetitive labor markets (unions) and high taxation seem to be driving down demand for the entire region.

Commercial property sales fell 42% in Cook County, according to RCA. That’s the second-biggest drop for the six Chicago-area counties. Only Lake County posted a bigger decrease, 44%.

Less demand among investors for commercial real estate will ultimately lead to lower property values.  In fact, some recent deals and data suggest it already has. An RCA index of commercial property prices in the Chicago area has fallen slightly over the past two years. Chicago was the only market among 32 tracked by RCA where prices fell. Price indexes for the Los Angeles, San Francisco, Houston and Boston markets all rose more than 10%.

In summary, investors are struggling to come to grips with future tax liabilities at the state and local level. Potential sellers will minimize the impact of these liabilities, buyers will overestimate them and in combination, buyers and sellers will move further apart in price expectations.

Green Street Advisors, a Newport Beach,Calif.-based research firm, gave the Chicago area the worst “fiscal health” score among top U.S. metropolitan areas. The firm issued a dire warning about the market falling into a “fiscal death spiral” that could lead to ever higher property and income taxes and an exodus of residents and companies.

 


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About Beau Beach, MBA CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com