The state’s commercial real estate industry is preparing for a tumultuous future as businesses throughout Illinois could leave their physical storefronts and office spaces following the three-month lockdown due to the Covid-19 pandemic.

The potential of a shrinking tax base is worrying municipalities that say the burden would then be shifted onto homeowners — something that could have political ramifications in a state consistently ranked as having the highest property taxes in the nation.

Illinois Municipal League Executive Director Brad Cole said he hears from hundreds of mayors throughout the state who worry that businesses will realize the redundancy of a big, expensive storefront property when online commerce and telecommuting easily serves their needs. Cole said that could easily have a downstream effect on other local businesses, like restaurants or bars that enjoy foot traffic or serve as a lunch or post-work meeting spot.

“If they’re not commuting to a downtown, they’re not buying lunch at the local sandwich shop,” Cole said.

But even without a mass exodus of retail and office tenants, commercial properties are predicted to see a major decline in property values, according to a report released earlier this month by Moody’s Analytics.

“Commercial values will show steeper declines caused by the sudden mandatory closures of restaurants, hotels and retail stores,” according to the report.

While a fix in the way online sales taxes are collected and remitted to local governments should ease the pain of the loss of physical shopping in many municipalities, Cole said empty storefronts and vacant buildings due to Covid-19 might cause permanent damage to municipalities’ business districts.

Preventing sales tax losses to lead to property tax hikes

Though municipalities won’t be making any decisions to raise property taxes until the end of the year, Cole said current sales tax losses are warning signs it could become a possibility.

The village of Schaumburg, for example, is projecting $20 million in revenue losses, including sales taxes, hotel taxes and food and beverage taxes. Schaumburg is a mecca of retail and office space in the Northwest suburbs, featuring large office parks and Woodfield Mall, still one of the largest shopping centers in the nation.

Village of Schaumburg spokeswoman Allison Albrecht said the village voted to defer capital projects, replace old vehicles and buildings and implement hiring freeze in its April budget. While the same budget cut property taxes based on paying off a decade-old bond program, Albrecht said a property tax hike wasn’t off the table for the future.

“It’s something our village board would have to take a very close look at to determine whether they want to change policies moving forward,” Albrecht said. “We’re making reductions in our budget just to keep up with the amount of revenues not coming in.”

Chicago Mayor Lori Lightfoot said last week that property tax hikes and layoffs are on the table if the city cannot find ways to fill the widening budget gap created by lost revenues in the hotel, entertainment, and other sectors.

Albrecht said it was “a really good sign” that approximately 50 local restaurants have elected to move forward with outdoor dining after Gov. JB Pritzker altered his economic reopening plan to allow for outdoor food and drink service beginning in late May.

“People want to come back,” she said.

Commercial real estate tries to prevent losses

Instead of completely pulling out of retail spaces, the commercial real estate market is trying to work with businesses to adjust their leases or come up with a payment plan for back-due rent, according to Austin Weisenbeck, the senior vice president of investments for retail at Marcus & Millichap, a real estate firm with holdings in Chicago and the suburbs. Weisenbeck said the commercial landlords he works with have made attempts to structure agreements with their businesses.

“[They’re] structuring an arrangement with a landlord by which they can handle some of the short-term pain that they’re experiencing to lessen the blow of it,” Weisenbeck said. “Whether that’s in the form of rental abatement or deferring rent.”

But Weisenbeck said it’s too early to tell whether the fears of vanishing retail and office tenants are warranted or if consumer behavior and workplace protocols will have changed after three months of working from home.

“Every disruption causes change,” Weisenbeck said. “But I want to personally be optimistic.”