While manufacturing and warehouse space in the O’Hare corridor remain tight, other forms of commercial real estate differ.
As the commercial real estate (CRE) market struggles with deepening woes, offices in particular are facing record-high vacancies. This is concerning for local governments, as they are expecting a significant hit to their property tax collections.
It’s crucial to understand the severity of this problem and which cities are most financially exposed. Property taxes are a key revenue source for municipal finances, providing 30% of revenues on average. If these tax collections suffer, most governments will have difficulty making up the difference elsewhere.
This is no ordinary downturn for the CRE industry, which is accustomed to ups and downs. The office vacancy rate has skyrocketed to 20%, the highest on record, and is poised to rise further as remote work continues to erode demand for office space. Notably, this has occurred during a relatively healthy economy. When the next recession hits and companies start laying off workers, the office market will likely suffer even more.
The plummeting value of office buildings in many cities is a clear indicator of the crisis. For example, a San Francisco tower that sold for $146 million a decade ago fetched only $80 million in December 2023. Similarly, a mixed office and retail building in Washington, D.C. that previously sold for $100 million in 2018 now commands just $36 million. These significant value markdowns will inevitably lead to lower tax assessments, further straining municipal budgets.
I have clients who invest in these types of properties, I hope that survive intact, with the declining values.