Sales of Chicago commercial buildings plunged in 2019: ‘Everyone was asking me what’s wrong with Chicago’

Investors cast a wary eye on Chicago last year, causing commercial property sales to plummet amid worries about property taxes, and adding to already mixed signals about the city’s real estate outlook.

Sales of office, apartment, hotel and industrial buildings in the city totaled $8.07 billion in 2019, down from the post-recession peak of $16 billion a year earlier, according to Jones Lang LaSalle.

With the dollar sales volume cut in half, last year was the worst year for commercial property sales since 2013, when transactions totaled $7.55 billion.

It was a far different story for the U.S. as a whole: The national dollar sales volume rose 2.7% last year, according to JLL.

Chicago’s poor showing provides further evidence that anticipated Cook County property tax increases could be weighing on the minds of deep-pocketed investors. If sluggish sales become a long-term trend, it could hurt the broader Chicago-area economy.

“There was a lot of weakness because Chicago was exposed to property tax changes coming to Cook County, and all the uncertainty that comes with it,” said Jim Costello, senior vice president at New York-based Real Capital Analytics.

“It’s a topic of conversation internationally,” Costello said. “I was in Japan and South Korea in November, and everyone was asking me what’s wrong with Chicago.”

Investor activity is far more important than just bragging rights, or lining the pockets of property sellers. A lack of dollars pouring into Chicago real estate also spells a hit to local taxing bodies.

Last year’s reduction in sales slashed about $95 million in city, county and state revenue generated from real estate transfer taxes in 2019, compared with the previous year’s total. That means less money for the Chicago Transit Authority and other services funded by local governments.

The largest sale of 2019, a $412 million deal for a Monroe Street office tower, generated more than $4.9 million in transfer taxes. That included $3.09 million collected by the city, of which more than $1.2 million went directly to the CTA. There also was $412,000 paid to the state and $206,000 to Cook County.

Last year’s property sales figures further jumble signals about whether the arrow is pointing up or down for Chicago real estate.

Bulls, including some brokers who sell high-dollar properties, see the slowdown as a blip more than a long-term trend.

The city continues to lure corporate offices from the suburbs and other cities, helping to extend a more than decadelong real estate boom. Big-name tenants such as Google, Uber Technologies, Salesforce and Facebook continue expanding offices in Chicago, and megadevelopments such as Related Midwest’s $7 billion The 78 and Sterling Bay’s $6 billion Lincoln Yards are among a wave of massive projects under construction or near the starting line.

“Regarding any potential increases in property taxes, Chicago still offers great value compared with other gateway markets like Boston, New York and San Francisco,” said Chicago office sales broker Bruce Miller of JLL Capital Markets. “Companies can save 20% to 40% on occupancy costs by locating to Chicago as compared to the other major markets.

“This is in part why the demand fundamentals in Chicago are stronger than virtually any other market in the country.”

Amid those mostly positive economic conditions, investors have been cautiously watching issues -- such as city and state fiscal challenges stemming from soaring pension obligations, as well as possible city policy changes such as tax increment financing reform, increased affordable housing requirements and rent control -- that could reduce profits for owners of Chicago buildings.

In particular, investors are bracing for the impact of higher property taxes expected in the city in 2021, as Cook County Assessor Fritz Kaegi enacts widespread changes to the way homes and commercial buildings are valued. The changes are expected to shift more of the tax burden to commercial property owners than homeowners.

With those added worries, several prominent Chicago-based developers have said they’re seeking projects in other cities.

Some landlords are staying the course, believing increases in property taxes will be lower than feared. But in the meantime, it’s causing hesitation among potential buyers, Costello said.

“Uncertainty is a killer for investment,” Costello said. “If you don’t know what the rules of the game are, how can you play?”

Beyond property tax worries, there’s no clear consensus on how much oomph remains in an already lengthy development cycle that has caused construction cranes to cluster along the Chicago River, the Fulton Market district and other areas of the city.

Property sales also are cyclical in nature, and many of the city’s biggest and best-known properties, including Willis Tower and the Aon Center, have changed hands in recent years.

The largest sale of 2019 was San Francisco-based Spear Street Capital’s $412 million purchase of the 46-story office tower at 500 W. Monroe St. from Johns Creek, Georgia-based Piedmont Office Realty Trust.

Other top deals included Boston-based Beacon Capital Partners’ $230 million purchase of the 41-story Philip Johnson-designed office tower at 190 S. LaSalle St., from New York-based Tishman Speyer; and German investor Commerz Real’s $167 million acquisition of Fulton West, an eight-story building recently developed by Chicago’s Sterling Bay.

But compare that with 2018 activity that included Sterling Bay paying $680 million for the two-tower Prudential Tower office complex and $510 million for the sprawling riverfront office building at 600 W. Chicago Ave.

Sales volume dropped the most among office buildings last year, when sales fell to $1.23 billion from $4.68 billion in 2018, according to JLL.

Some large deals were pulled from the market after failing to find a buyer, such as New York-based AmTrust Realty Corp.’s portfolio of seven downtown buildings that it had hoped would sell for well over $1 billion. Last year’s numbers also were down in part because of deals that didn’t close by the end of 2019, JLL Capital Markets’ Miller said.

“Anecdotally, I think it could be an active year this year,” Miller said. “Investors are still deeply interested in Chicago as an office market.”

Sales of apartment buildings in the city fell last year to $3.21 billion, from $5.29 billion.

Developers don’t appear to be deterred, drawing up plans for 10,000-plus units to be completed downtown by 2022, according to Integra Realty Resources.

For investors looking to buy apartment towers rather than build them, now could the chance to pounce, said Ron DeVries, a senior managing director at Integra.

“The market has obviously slowed down for investment sales, because of things like what’s happening with real estate taxes and what’s happening with our state’s economy,” DeVries said. “But there’s a ton of capital out there chasing deals, and I think we might start to see some more transactions in Chicago.

“The uncertainty, I think, does create some opportunity.”

One investor scouring the market for deals is Nick Ryan, CEO of Naperville-based apartment developer Marquette Cos. Marquette recently developed The Mason in the Fulton Market district, and said it’s 95% leased.

“A seven-month lease-up on 263 units, that shows the strength of the market,” Ryan said. “We’re pretty bullish.”

The biggest obstacle to deal-making is that strong leasing and rent growth combined with slow investment sales have created a gulf in pricing expectations between sellers looking to cash out on new developments and buyers shopping for a bargain, he said.

“I think buyers are hesitant until things shake out with property taxes, but sellers aren’t willing to take a big discount,” Ryan said. “We’re looking hard for deals, but people’s expectations are still high.

“So it’s a matter of getting to that meeting of the minds between buyer and seller.”

[email protected]

Twitter @Ryan_Ori

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