If Blake is indeed hallucinating the school, how does the camcorder function?
I read a theory a while back that the flashes of light makes electronic devices (such as helicopters and cameras) malfunction. This is why we only see static whenever we review a recording in the school.
If this is the case, then how does the camcorder show the school? The towers are currently active, so the camera should malfunction, and therefore show no image.
I know it's ignored in the game for the sake of simplicity (for the dark areas in the school) but this big of a plot hole is in my opinion too big to ignore.
Not really. The camcorder, as it shows, does not pick up anything Blake experiences in school areas. The camera shows, game wise, only what he sees in the moment and as a way for navigation and acquiring collectibles. Blake's camcorder is never directly exposed to these bright flashes of light and, if you want an excuse for this, there are devices that are, somewhat, protected from EMP effects.