Chicago’s financial difficulties and investors’ fear of higher taxes to cover unfunded liabilities have caused some investors to delay property purchases or avoid the area market altogether. The city’s commercial real estate values dropped significantly in 2019.
Chicago’s Declining Real Estate Values
Sales of commercial properties in Chicago came in at $7.7 billion in the first three quarters of 2019. That figure represents a drop of 33 percent from the same period in the previous year. In fact, Chicago commercial real estate values performed worse than those in any other major city.
Fear of the Unknown
There are several good reasons for investors to remain in Chicago’s commercial real estate market. The city retains its place as the preeminent city of the Midwest, a center of business that also is home to important educational and cultural institutions.
Despite so many reasons to be in the commercial real estate market, investors increasingly avoiding Chicago because of the fear of the unknown. For many investors, Chicago’s financial uncertainties make investing in real estate risky.
The Cycle of Decline
The biggest factor driving this fear is Chicago’s unfunded pension liabilities. As these liabilities come due, the burden falls to the city to find a way to make the payments. Funding these liabilities could cause property taxes to increase dramatically.
This worry is not without basis as evidenced by the increase in commercial property assessments by the Cook County Tax Assessor. With the possibility of a massive property tax increase looming over investors’ heads, the demand for commercial property has decreased.
As demand weakens, property values decline. As values decline, property owners are less willing to sell. Fed by fear of the unknown, the cycle of decreased demand and declining values continues with no immediate end in sight.
The Key–Proceed With Caution
Chicago real estate investors face difficult decisions in the coming year. Some have already decided to avoid the Chicago market altogether. Others recognize that with declining property values there may be opportunities for investment that would not otherwise exist.
An undervalued property in a vibrant neighborhood can still be a good investment. Those who proceed cautiously, do the research, and obtain professional assistance if needed can still find good investment properties at a price that can offset the fear of the unknown.
