By Michael Millar, principal, Open Slate Communications
The Real Estate Investment Association (REIA) and the Real Estate Center at the Driehaus College of Business recently held the 14th Annual State of the Industry Summit. The theme for this year’s event was based on the Mid-Year Perspective on Chicago Real Estate Markets, a report the center published in July.
Panel participants at this year’s event included James D. Shilling, the George L. Ruff Endowed Chair at the Real Estate Center; Elizabeth L. Gracie, member, O’Keefe Lyons & Hynes LLC; Michael Episcope, principal and co-founder, Origin Investments; and Marcus Hamacher, senior vice president, Ziegler Capital Investments.
To kick off the event, Charles Wurtzebach, chair of the Department of Real Estate at the Driehaus College of Business, addressed panelists. Afterward, Shilling gave a brief recap of some of the findings from the center’s Mid-Year Perspective report.
Following are some of the highlights and key takeaways from the panel discussion:
Trade Wars: Who Really Wins
Shilling suggested that one of the factors causing a cautiously optimistic view of the future real estate market is the trade wars that are happening between the U.S. and other countries. Shilling said a healthy trade balance between any two countries facilitates sharing of products and knowledge. When tariffs are put in place, it reduces the flow of knowledge, causing prices to increase while driving demand.
He said the impact of the trade wars is likely to cause a 20 percent overall decline in trade globally. He also noted that measures the Chinese take, such as lowering the value of their currency to make their products less expensive, are likely to be met by further tariffs on the products they make and sell.
Property Taxes: Three Things to Know
Gracie reminded the audience that three basic factors determine property tax liability
- Budgets of local governments. Gracie explained that the budgets of local governments determine the size of the tax pie, while individual assessments determine the size of the slice that must be swallowed by any particular property. In Chicago, 12 units of local government make up the composite tax rate, not just the City of Chicago, itself. So, even though the city’s property tax levy has increased dramatically since 2014 to begin to catch up on unfunded pension liabilities, taxes have not increased to the same degree. In 2017, the city and Chicago Public Schools accounted for 23 percent and 54 percent of the taxes collected in the city.
Market value. Gracie noted that discrepancies exist between the market values established by the assessor and purchase prices. She observed that Fritz Kaegi, the Democratic nominee for Cook County assessor, points to the list published by Crain’s Chicago Business of the 50 biggest property sales over the last five years. The purchase prices in those transactions amount to $17 billion, while the assessor’s market values total $7.8 billion.
Kaegi asserts that under valuation of commercial property in the Central Business District unfairly shifts the property tax burden on to residential taxpayers. He proposes to “mark to market” the values of these properties.
- Classification. Elsewhere in Illinois, all property is assessed at 33 and one-third percent of market value. In Cook County, residential property is assessed at only 10 percent of market value while commercial property is assessed at 25 percent of market value.
In the case of the 50 properties listed by Crain’s and cited by Kaegi, the assessments presumably total 25 percent of the assessor’s market value of $7.8 billion or $1.95 billion. Such assessments amount to 11.5 percent of the $17 billion purchase prices. This 11.5 percent level of assessment for the 50 commercial properties compares to 10 percent for residential properties.
Gracie asserted that commercial property is only assessed at an unfairly low level, if one accepts that it is fair to assess commercial property 2 and-a-half times more highly than residential property. This classification system is governed by county ordinance, which is within the purview of the Cook County Board of Commissioners.
Gracie observed that each one of these factors is controlled by government officials who are all standing for election in the coming months. Even though many of them are running unopposed, this is still an opportune time to get their attention.
Hamacher said the federal government has been good about telegraphing its moves at it relates to interest rates. As a result, he expects another rate increase before the end of the year and another four hikes in 2019.
“Being able to anticipate the rates increases makes it easier for the market to be able to price things,” he said, adding that in spite of the rate increases that have occurred, he hasn’t seen big shifts in cap rates.
Underwriting and Interest Rate Impact
Episcope also mentioned the federal government’s honesty about interest rates, but added, “They are what they are.” He also said that lenders have absorbed a majority of the rate increase, minimizing the impact to buyers.
Moving forward, though, he said that because lenders won’t be absorbing as much, if any, of the increases, we may begin to see a shift in pricing.
“That’s our concern,” he said. “That we are at the precipice of it having a magnifying impact.”
Other notes and highlights:
- Regarding concerns about a housing bubble, Shilling said the housing industry has seen a 25 percent recovery since 2012—an even higher level in the Kate Shiller Index. The redeeming quality is there has been a huge reduction in mortgage debt, from seven-and-a-half to four-and-a-half time’s income.
- Episcope said Chicago is an anomaly when it comes to real estate taxes, largely because most other key markets are in better fiscal shape. But he also reinforced that Chicago is a great city overall, and while there is uncertainty in real estate tax matters, there is a lot less risk and overall uncertainty here.
- Gracie echoed that Chicago is a great place to invest, especially if holding for the long term. She acknowledged that some shakeout is coming to the property tax system, and added that we should watch the reassessments in the suburbs to anticipate what will happen in the next three-year reassessment of Chicago.
- Hamacher said one of the greatest growth areas continues to be the senior housing market, with lots of private funds stepping up their investments. That equates to “a ready state of buyers.” He said the growth is mostly driven by demographics and healthcare.