(Bloomberg) -- A struggling downtown Chicago real estate market is making it difficult for officials to determine property values in the first such assessment since the end of the pandemic.

Last year, less than five large office buildings in the city changed hands, and those deals sold at losses ranging from 50% to 90%, according to the Building Owners and Managers Association of Chicago. The small number of deals and deep discounts are thwarting price discovery and spurring Cook County Assessor Fritz Kaegi to consider leaving out the most distressed office tower sales in his calculations.

“If there’s some kind of duress or serious time pressure where they couldn’t be properly shopped, that’s one of those things that might make you take that value with a grain of salt, just as you would any other asset that trades under distress conditions,” Kaegi said in an interview. He also noted that such transactions that violate appraisal rules are “not representative of where the market actually is.” 

The value of properties in Chicago’s downtown is central in determining how the tax burden is spread across residents and businesses. If Kaegi excludes distressed sales from his analysis, other building or residential owners could face higher taxes when they are still recovering from the pandemic.

“Given the assessor’s previous actions to shift more property tax burden onto commercial property despite COVID-era market conditions, it’s unclear whether he will now acknowledge the drastic drops in downtown office building values Chicago is experiencing,” Farzin Parang, executive director of BOMA of Chicago, said.

Soaring property taxes have been a long-time sore spot in the third largest US city. Recently, Chicago has faced criticism over high profile exits by residents and businesses — most notably billionaire Ken Griffin taking his family and hedge fund Citadel to Miami in 2022.

Civic Federation President Joe Ferguson said the valuation of the commercial district is key. Several indicators point to some of the Loop, Chicago’s main area for office towers, “laboring under likely significantly reduced value,” Ferguson said. 

Last month, Chicago real estate firm R2 paid about $60 million for a 41-story building on the city’s iconic Michigan Avenue, about half the price for which it sold in 2017.

Chicago’s challenges underscore the commercial property distress that’s hitting lenders from New York to Japan. Lenders have been stung by losses on souring property loans, particularly tied to office properties. And a few more sales in recent months have increased the risk that more lenders and owners will need to confront valuations that have changed drastically since interest rates started rising in 2022.

“As our office industry continues to struggle with record-high vacancy and plummeting values — and if large office buildings are assessed fairly — we expect to see a notable shift in property tax burden to homeowners across the city,” Parang said.

Even with workers trickling back into offices post-pandemic, Chicago’s downtown vacancy rates stood at 23.5% at the end of last year, far from pre-Covid-19 levels of 13.1% at the end of 2019, according to Cushman & Wakefield Plc.

If market factors are excluded, “we risk further harming recovery” in the central business district, neighborhood commercial corridors and for small businesses citywide, according to Jack Lavin, head of the Chicagoland Chamber of Commerce.

Kaegi said his office in 2021 baked in vacancies of 20% or more and he expects “there’ll be more vacancy baked in following the developments that Chicago has experienced” just like peers across the country.

That said, he noted that newer, so-called trophy buildings, “are holding up much better” and Chicago’s return-to-office rates top those of the coasts and lag only the big cities in Texas.

Both home and building owners are fatigued from years of property tax increases. Total assessed property value increased 31% to $47 billion in 2021 from 2018, with the bulk of that coming from non-residential properties, according to the Cook County assessor’s website. 

Property valuations are a crucial part of budgeting for Chicago and other cities like New York City to San Francisco, which for more than a decade have relied on tax levies from an expanding commercial real estate sector to pay for schools and public safety. Additionally, in Chicago, property taxes are the largest source of revenue for its severely underfunded pensions.

Read more: NYC Skyscrapers Sit Vacant, Exposing Risk City Never Predicted

Kaegi said his team will talk to brokers, owners and tenants seeking leases as well as sift through data on vacancies, rents, cost ratios and sale price. Assessments, which are conducted every three years in Chicago, are expected to be released later this year. 

“There’s sort of different expectations between buyers and sellers right now,” he said. “That’s a conundrum that we have to work through as we try to value the buildings.”

--With assistance from Miranda Davis.

©2024 Bloomberg L.P.