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Midwest Moves On

Market Data
Midwest Moves On
After a year of ups and downs, regional markets level out.
by Carolyn Bilsky

While the Midwest ended 2005 with mixed messages, most commercial real estate markets in the region have reason to expect better performances this year.

Several Midwestern markets have plans for large retail and entertainment developments. In Kansas City, Kan., the $248-million, 750,000-sf Legends development features more than 100 retail and restaurant tenants as well as an adjacent Great Wolf Lodge resort with an indoor waterpark. Other Midwestern projects include a 400,000-sf, 14-acre mixed-use center in Northbrook, Ill., which features the submarket's first new hotel in 17 years, and several developments in Ankeny and West Des Moines, Iowa, according to Heartland Real Estate Business.

Industrial vacancies are low in markets such as Kansas City, Indianapolis, Detroit, and Cleveland, according to CB Richard Ellis. The industrial sector looks especially optimistic in Indianapolis where developers have 3.5 million sf of warehouse/bulk distribution space under construction.

In Milwaukee, economic growth is expected to cause apartment rents to rise 2.5 percent to $682 per unit per month on average and vacancy rates to fall to 9 percent, according to Marcus & Millichap. In Omaha, Neb., multifamily properties attracted attention from national investors as sale prices rose and occupancy reached 92 percent at the end of the year. Omaha's three biggest real estate transactions were multifamily properties, the largest, the 300-unit Tregaron Oaks, sold for $19.1 million, according to Grubb & Ellis.

In Chicago, the downtown office market ended the year with a 16.7 percent vacancy rate, an increase over year-end 2004. With no new office construction in the pipeline for the first half of the year, occupancy is expected to increase according to CB Richard Ellis. Other Midwestern cities seeing high office vacancy rates included Detroit and Columbus, Ohio, with the highest vacancy rates in the nation - 22.9 percent and 20.5 percent respectively at the end of 2005, according to CB Richard Ellis.

In the three years leading up to Super Bowl XL, the city of Detroit completed more than 142 construction projects and many in the poorest big city in the U.S. hope the momentum will continue throughout the year. Estimates on the economic impact of the Super Bowl range up to $300 million. New developments include a riverwalk and a housing development on the site of a former Uniroyal Tire plant.

Despite job cuts and some economic hardships in markets such as Detroit, Midwest fundamentals are expected to improve this year.

MINNEAPOLIS-ST. PAUL
Office Appeals

Last year the Twin Cities multitenant office market was especially strong, according to Minneapolis-based United Properties. The market had an average vacancy rate of 16.1 percent, a 2.2 percent decrease from 2004. Market absorption totaled 1.47 million sf for the year, the market's highest rate in five years.

Class A office space, especially on top floors in central business district office towers, was a popular leasing choice. Even though class A vacancy rates have remained high at 18.4 percent, demand has driven vacancy down for a full year, United Properties reports.

This year should bring more of the same for the Twin Cities. Rental rates will rise and overall vacancy should drop another 2 percent, according to United Properties. As more property is absorbed, speculative construction will increase.

DETROIT
Industrial Change Approaches

As the Big Three - Chrysler, General Motors, and Ford - cut jobs and costs, Detroit's industrial market will experience an increase in supply as manufacturing facilities and warehouses are no longer needed. With both vacancy rates and second-generation supply increasing, rents and sale prices should fall throughout the year, according to Grubb & Ellis.

CHICAGO
Hotel Hand-offs

Chicago led the nation in hotel sales last year. Forty-one hotels changed hands, more than triple the number the previous year, according to Lodging Econometrics. Hotel sales totaled $1.24 billion in 2005 compared with $265.7 million in 2004. Large transactions included the Palmer House Hilton selling for $230 million to Thor Equities LLC and the $155 million sale of the Fairmont Chicago to Strategic Hotel Capital.

So far this year the market's momentum continues. The 357-room Best Western Inn of Chicago, built in 1928, was sold in February by Inn of Chicago Associates LP to IOC Hotel LLC, a joint venture between Oxford Lodging Advisory & Investment Group LLC and Longwing Real Estate Ventures LLC, for approximately $40 million.

In March, Diamond Rock Hospitality Co. agreed to buy the 1,192-room Chicago Marriott Downtown Magnificent Mile for $295 million. The sale is expected to be finalized by the end of 1Q06 and generate $25.8 million in earnings for the year, according to Diamond Rock.

photo credit: Oxford Lodging

INTERNATIONAL BEAT
Investors Expect Changes

Global investors plan to place fewer dollars in the U.S. real estate market this year according to an Association of Foreign Investors in Real Estate survey. The 175 AFIRE members located in 17 countries said 47 percent of their portfolios will be U.S. properties, a decrease from 55 percent in 2005. Other attractive markets include Western Europe and the United Kingdom.

Despite the decrease, foreign investors still are pumping $19 billion into U.S. properties, says Mark Baillie, AFIRE chairman. And, 74 percent of respondents find U.S. real estate investments the most stable and secure.

One change expected this year is where investment dollars come from: Respondents predict that 40 percent will come from Australia, while 49 percent will come from Germany.

KALAMAZOO, MICH.
Breathing Life Into Industrial Properties

As one of the nation's fastest growing life sciences markets, Kalamazoo is home to more than 50 percent of Michigan's life science jobs. The market continues to grow as start-up companies expand and need additional space. Regional incentive programs, including the Southwest Michigan Innovation Center, a 58,000-sf wet lab incubator-accelerator, and the Bank Consortium for Innovation, attract new tenants to the area.

Vacancy rates have been high, but transactions at the end of last year and early this year are helping raise absorption rates. Recent leasing in the 1.6 million-sf Midlink Business Park brought the property's occupancy up to nearly 70 percent. A 115,000-sf manufacturing facility at Western Michigan University's Business Technology and Research Park recently sold to an institutional investor as well, reducing vacancy rates. Rents are expected to remain steady throughout the year.

Sources: Grubb & Ellis and Southwest Michigan First

MADISON, WIS.
Industrial Hits Milestones

  • Last year overall industrial absorption reached a five-year high at 1.1 million sf and year-over-year vacancy decreased 0.5 percent.
  • The smallest but hottest industrial subtype is incubator space. Last year vacancy rates in this sector fell 490 basis points to 3.7 percent.
  • While nearly every industrial property type improved last year, general industrial properties made the most progress with more than 900,000 sf of absorption.
  • Rather than moving to new spaces, owner-occupants are expanding current locations or building new ones.
  • One of Madison's first industrial condominiums with 3,400-sf to 102,400-sf units is currently under construction. The starting price for each unit is $155,900.
  • The state of Wisconsin has offered $65 million in tax credits to "angel investors" to encourage the development of biotechnology projects.

Source: Grubb & Ellis

Multifamily Markets Fare Well
Secondary markets are becoming increasingly attractive to multifamily investors looking to place the capital they've earned in primary-market investments. In the Midwest, Cincinnati, Indianapolis, and St. Louis are experiencing a surge in investor interest and activity, according to Multifamily Executive Online.

Luxury condominium developments are saturating several Midwest markets, including the Cincinnati area. The $40 million Ascent at Roebling's Bridge in Covington, Ky., is an 80-unit condominium property where average sale prices top $900,000 per unit.

photo credit: Corporex

ST. LOUIS
Retail Shows Range

Occupancy rates in St. Louis' retail properties are lower than both the U.S. and Midwest averages, but retail inventory has increased more in the city than either the region or the country. As developers and retailers try to find new ways to appeal to consumers seeking a more urban shopping environment, mixed-use lifestyle centers are becoming increasingly popular, according to Colliers Turley Martin Tucker.

An 18-acre, $290-million downtown entertainment project known as the Bottle District broke ground in September 2005 and is slated for completion in spring 2007. The Bottle District will have more than 900,000 sf of entertainment, retail, restaurant, and residential space, according to St. Louis Construction News and Review. So far tenants include Cabo Wabo Cantina, Rawlings All American Grille and sports museum, Grand Prix Speedways, and a bowling alley.

Other downtown developments include the $300 million Ballpark Village at the site of the former Busch Stadium. This mixed-use development includes retail, office, and residential properties and will break ground in 2007. Completion will take four years.

Rents in these mixed-use developments are expected to increase as they have in projects already completed such as Schneithorst Village and Kirkwood Station, which have triple-net-lease rates ranging from $25 psf to $45 psf, according to Colliers.
image credit: DMR Architects

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Area Report is written by Carolyn Bilsky, associate editor of Commercial Investment Real Estate.

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