The Impact Of Chicago’s Proposed $68.5M Real Estate Tax Hike

On December 10, 2024, the City Council Finance Committee narrowly approved a revised $68.5 million property tax increase proposed by Mayor Brandon Johnson to address a massive $982 million budget shortfall. This is a scaled-down version of the originally suggested $300 million hike, following strong resistance from both city council members and residents. While this decision alleviates some immediate financial concerns, it introduces a host of potential ripple effects on Chicago’s real estate market, spanning both commercial and residential sectors.

The Impact on Residential Real Estate

Increased Cost of Living

The property tax increase directly affects homeowners, as they’ll shoulder higher annual property tax bills. Even though the hike was reduced, the additional costs may strain household budgets, especially for low-income families and first-time buyers. The increased cost of owning a home could diminish affordability, driving prospective buyers toward more affordable suburbs or rentals outside the city limits.

Rising Rents

For rental properties, landlords are likely to pass the increased tax burden onto tenants by raising rents. With Chicago already experiencing affordability challenges, higher rents could exacerbate the problem, leading to greater tenant turnover or increased vacancy rates in rental properties.

Shift in Investment Focus

Investors in multi-family properties might reconsider Chicago as a viable market. Higher property taxes could erode returns, making investments in other Midwest cities with lower property taxes, such as Indianapolis or Milwaukee, more attractive.

The Impact on Commercial Real Estate

Higher Costs for Businesses

The commercial sector, already grappling with lingering effects of remote work and economic uncertainty, faces new challenges. Owners of office spaces, retail properties, and industrial facilities are likely to increase lease rates to offset the higher taxes. For small businesses operating on thin profit margins, this could mean relocation to tax-friendlier areas or downsizing operations.

Increased Vacancy Risks

Higher property taxes make it harder for landlords to attract and retain tenants. With businesses leaving Chicago or avoiding it altogether, vacancy rates could rise in key commercial sectors. This is particularly concerning for office spaces, where vacancy rates are already elevated due to hybrid and remote work trends.

Sector-Specific Challenges

• Office Spaces: Chicago’s office sector has struggled to fill vacancies due to hybrid work models. Increased taxes may dissuade businesses from leasing office space downtown, further driving vacancies and reducing property valuations.
• Retail Spaces: Retailers, especially those in lower-margin sectors, may struggle to absorb increased costs. Store closures or relocations could weaken major retail hubs, impacting foot traffic and the viability of surrounding businesses.
• Industrial Properties: While the Chicago industrial sector may initially withstand the impact due to its essential nature, higher taxes could discourage companies from expanding their logistics and distribution networks within the city, particularly as nearby suburbs offer more competitive tax environments.

Broader Implications for Investors

Reduced Market Attractiveness

For investors, the property tax hike creates uncertainty and increases the cost of doing business. Many investors prioritize markets with stable tax policies and predictable returns. Chicago’s current fiscal policies may push them to consider alternative markets like Nashville or Columbus, where tax structures are more predictable and property yields remain high.

Capital Flight

As investors shift their focus away from Chicago, the city could face a slowdown in new developments and a decline in property values. This is particularly concerning for neighborhoods relying on real estate investments to drive economic growth and redevelopment.

Residential vs. Commercial Investment

Investors may also shift their portfolios within Chicago. For instance, high-yield residential properties might appear safer than commercial investments in an uncertain tax environment. However, both sectors will feel the effects of reduced investor confidence and increased costs over time.

Opportunities Amid Challenges

While the property tax hike poses challenges, it also presents opportunities for innovative investors and developers willing to adapt.

Adaptive Reuse Projects

Vacant commercial spaces, particularly offices, could be converted into residential or mixed-use developments. This could address the housing affordability crisis while revitalizing struggling commercial districts.

Focus on Sustainability

Investors might look to implement energy-efficient upgrades in properties to offset operating costs and appeal to eco-conscious tenants. In the long run, such initiatives can reduce expenses and enhance property values.

Suburban Expansion

Investors and businesses may focus on suburban markets outside of Chicago, where tax burdens are lower but access to Chicago’s workforce and infrastructure remains intact. Suburbs like Naperville, Schaumburg, and Oak Brook could see an uptick in demand for office, industrial, and residential properties.

Strategies for Stakeholders

For Property Owners:

• Appealing Tax Assessments: Owners should ensure their property tax assessments accurately reflect the market value of their properties. Filing appeals when overassessed can mitigate tax burdens.
• Cost-Saving Initiatives: Implementing measures like energy-efficient building upgrades can lower overall expenses.

For Investors:

• Risk Diversification: Investors should consider diversifying their portfolios across different asset classes and geographic regions to hedge against the risks posed by higher taxes.
• Due Diligence: Evaluating the long-term fiscal policies and property tax structures of Chicago before making investment decisions is crucial.

For Occupiers (Tenants):

• Lease Negotiations: Tenants should seek lease agreements that address the potential for tax increases, such as including caps on tax pass-throughs.
• Location Flexibility: Businesses should evaluate the total cost of occupancy across Chicago and its suburbs to identify the most cost-effective locations.

The Path Forward

The $68.5 million property tax hike is part of Chicago’s broader effort to address its $982 million budget deficit. While it avoids the drastic increases initially proposed, the hike underscores the city’s ongoing fiscal challenges. Policymakers must balance the need for revenue generation with the risk of eroding the city’s competitive edge in real estate.

The coming years will be pivotal in shaping Chicago’s real estate landscape. Stakeholders must stay informed and proactive, adapting to policy changes and leveraging opportunities where possible. Investors, property owners, and tenants alike will need to navigate this evolving environment with care.

By understanding the implications of this tax hike and implementing strategic measures, stakeholders can not only weather the storm but also capitalize on emerging opportunities in Chicago’s real estate market.