Declining commercial real estate values are blamed for increased property taxes in Chicago. What’s the real story?

Challenging times for Chicago’s CRE industry

Final 2022 property tax bills were recently mailed in Cook County and property taxes are once again on the rise. The recently reassessed north and northwest suburbs are facing the highest tax increases in 30 years. But while some may feel commercial properties are getting off easy, the reality is that the tax burden has been anything but easy for Chicago’s commercial real estate industry. Featured widely in the news, property taxes in Illinois are some of the highest in the US, as well as among the most challenging to interpret. To make sense of the stories behind the headlines, it may be helpful to understand how the property tax and assessment system operates in Chicago, how valuations, sales and property taxes compare, and what might be ahead when the city townships are reassessed in 2024.

Chicago has not escaped the post-pandemic troubles facing office buildings in urban centers across the country. Ratings agency KBRA reported in August that Chicago’s commercial real estate sector loans had the highest distress or delinquency rate among the top 20 US metro cities. In September, Bisnow reported that the AON Center, Chicago’s fourth-tallest building at 83 stories, with 2.8 million square feet of leasable area, had lost nearly half of its value since 2018. Occupancy at the property had dropped from 89.7% to 76%, and operating expenses had increased – led by a 40% rise in property taxes. 

Why are commercial property taxes in Chicago increasing? 

The Cook County assessor has publicly stated that commercial properties have been historically undervalued. With the last revaluation, assessments were updated from 2018 to 2021 values, and commercial property assessments increased by a total of 77%, as compared to residential increase of 14%.

The shift in assessed values was at odds with the 2021 market – while commercial properties were trying to recover from the pandemic, residential property values jumped substantially.

Many commercial property owners appealed their increased values, and the Board of Review granted them reductions, only to have the County assessor restore the original assessed values for 2022. Most of these properties appealed again and obtained similarly reduced values from the Board of Review.

Interested in Altus Group’s valuation parameters and sales for 9 major markets in Q2 2023? Download them now

Altus data for Q2 2023 points to declining values in all CRE sectors

Property appraisals prepared by Altus Group for properties in major urban centers across the country indicated that between Q1 2022 and Q2 2023, average values dropped, largely due to increases in capitalization rates and stagnating rents.  In Chicago, the most dramatic effects were found in the office sector, where average appraised values dropped more than 18% as compared to Q1 2022 and average capitalization rates were 35 basis points higher.

Figure 1 - Chicago average market parameters and sales per Altus Group Q2 2023 vs Q1 2022

*Values and parameters from Altus Group are based on a limited number of assets and are not necessarily representative of the market as a whole. Capitalization rates are year 1-5 average implied rates.

Chicago commercial property owners pay more than 2.5 times the taxes residential owners pay  

In Cook County, property taxes are calculated by applying the tax rate to the “equalized assessed value”. The Cook County assessor determines the value and an assessment factor is applied (10% for residential, 25% for commercial and industrial) to determine the taxable portion of the assessment.  Each year, the state calculates an equalization factor based on sales from the previous three years as compared to assessments.  For the 2022 tax year, the equalization factor was 2.92.  The assessed value is multiplied by the equalization factor to determine the equalized assessed value.  The result is a value subject to taxation that is 2.5 times higher for commercial properties than for residential properties.

Using the average per square foot values identified in the Q2 2023 sample above and the estimated effective tax rates, taxes per square foot (psf.) for office, retail and industrial are estimated below:

Figure 2 - Estimated 2022 tax rates per square foot per average Q2 2023 appraisal values

What’s next for commercial property owners in Chicago?

The Cook County assessor revalues properties in one-third of the county’s townships each year, meaning every property is revalued every three years. The assessor may also change the values mid-cycle – as was done with AON Center and other downtown office buildings.

Assessments in North and South Chicago townships are currently based on the assessor’s determination of market value as of January 1, 2021, and are scheduled for revaluation for the 2024 taxation year, based on market values as of January 1, 2023.

Figure 3 - Cook county triennial reassessment cycle

Assessments for the 2023 taxation year will be issued this fall, with 2023 tax bills payable in 2024.  To obtain a reduction in your 2023 taxes, you must file an appeal before the deadline – which is 30 days after the assessment notice is mailed.

The Cook County Board of Review website provides a list of open townships and appeal deadlines.

Want to be notified of our new and relevant CRE content, articles and events?