REIA and DePaul University recently held their 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 published in July by The Real Estate Center at DePaul University.
Panel participants is this year’s event included James D. Shilling, the Michael J. Horne chair, real estate studies, at DePaul University; 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.
Before panel participants were questioned by Charles Wurtzebach, chairman, department of real estate, The Real Estate Center at DePaul University, Shilling opened with comments and a brief recap of some of the findings of the Real Estate Center’s mid-year perspective.
Following are some of the highlights and key takeaways from the panel discussion.
Trade wars: Who really wins
Schilling suggested that one of the factors causing concerning and a cautiously optimistic view of the balance of 2018 and 2019 is the trade wars that we’re now hearing so much about. According to Shilling, 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, causes prices to increase while driving demand and GDP lower.
The impact of the trade wars, Schilling said, 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, market value and classification. Each one of these factors, she observed, 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.
The budgets of local governments determine the size of the tax pie, Gracie said, 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 of Chicago and Chicago Public Schools accounted for 23 percent and 54 percent, respectively, of the taxes collected in the city.
Gracie noted that discrepancies exist between the market values established by the assessor and purchase prices. She observed that the presumptive new assessor, Fritz Kaegi, points to the 50 biggest property sales over the last five years, and the purchase prices in those transactions amount to $17 billion while the assessor’s market values total $7.8 billion. Kaegi asserts that the under-valuation of commercial property in the CBD unfairly shifts the property tax burden on to residential taxpayers. He proposes to “mark to market” the values of these properties.
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. So, in the case of the 50 properties 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. So, Gracie asserted, commercial property is only assessed at an unfairly low level, if one accepts that it is fair to assess commercial property two 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.
Hamacher said the Fed has been very good about telegraphing its moves at it relates to interest rates. Based on that, he said he fully 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.
Episcope also mentioned the telegraphing being done by the Fed, 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, Episcope believes 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, that we are at the precipice of it having a magnifying impact,” Episcope said.
In response to a question about any concerns for a housing bubble, Shilling said that the housing industry has seen a 25 percent recovery since 2012—an even higher level in the Kate Shiller Index. The saving grace, he noted is there has been a huge reduction in mortgage debt, from 7.5 to 4.5 times income.
Episcope said that 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. She added that we should watch the reassessments in the suburbs to anticipate what will happen in the next triennial 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, he said, equates to “a ready state of buyers.” He said it largely is demographic and healthcare driven, and that you can’t stop or slow it!