After years of major downtown office deals, investor activity in the sector has virtually gone dark.
Investment sales of office buildings in the central business district dropped to a 20-year-low this year, according to a new report from MB Real Estate. Through two quarters, only seven office buildings totaling less than 1 million square feet have traded, the report said.
The lack of investor activity comes despite a surge of available properties in the central business district. In May, 22 office buildings were being marketed for sale, likely the most available at one time during this economic cycle, experts told The Real Deal. Currently, there are 16 buildings on the market, with five others under contract, according to MBRE.
The downtown office market had a particularly quiet second quarter, with only one building trading: the $22 million sale of 19 South LaSalle Street, which was bought by local investor Ruben Espinoza. Four other buildings went under contract in the second quarter, according to MBRE. Six office building sales closed in the first quarter.
The quiet investor market, plus the surplus of available properties, can be chalked up to changing dynamics in the Chicago office market and changing political headwinds, experts said.
For one, a rash of new office developments has increased the competition for tenants. Over 3.5 million square feet of downtown office space was delivered in the last two years, with 2.7 million more square feet expected to come online this year, according to MBRE. The vacancy rate for the Downtown office market stood at 12.5 percent at the end of the second quarter.
Some of the city’s biggest office tenants, including BMO Harris and Bank of America, will leave the Central Loop for new office buildings. The large vacancies that will be created by those moves dampened investor appetite for some properties.
But the single biggest factor hurting the office investor market in Chicago is the uncertainty over future commercial property taxes, said Kevin Purcell, president of Leasing and Management Services for MBRE.
“The uncertainty involving real estate taxes is causing a lot of people to think twice about investing,” Purcell said.
New Cook County Assessor Fritz Kaegi is working to overhaul the property tax system that he said unfairly penalizes homeowners in favor of commercial landlords. Some commercial properties, including apartment buildings in Evanston, have already seen big tax increases. Downtown properties will be reassessed in 2021.
Investor activity will likely be at a minimum until there is more of an idea of what taxes could look like in the future, Purcell said.
“Pushing more of the burden onto commercial assets, that will have a detrimental effect going forward,” he said.
The lack of recent deals does not mean investors have completely tuned out Chicago, Purcell said. Job creation and corporate relocations to the city remain strong, both good indicators for the office market.
Guidance on the future of real estate taxes — and the continued strong absorption and lease signings — will likely lead to a return of the investment sales market, Purcell said.
“When you see pricing on the coasts, Chicago still represents a value,” Purcell said. “There’s strong interest. The real estate taxes become the problem.”