Chicago a Sweet Home to Many Real Estate Markets
Chicago is a commercial real estate kind of town. Home to just under eight million people, the Windy City’s metropolitan area has seen myriad activity lately in all of its major property types. "The Chicago-area economy is strong due to its diversity, centralized location, and the overall economic climate," raves Patrick McCourt, CCIM, of CB Richard Ellis in suburban Schaumburg, Ill.
For the first time in several years, serious talk of new office development in Chicago’s CBD occurred in 1998, although global financial woes have delayed plans, according to Cushman & Wakefield’s Chicago office. "Four major projects are vying to be the first to start [construction in Chicago’s downtown ‘Loop’ east and south of the Chicago River]," says Ray Zabielski, CCIM, of the Zabielski Group in Naperville, Ill. "The front-runner is John Buck’s One North Wacker, planned at 1.6 million sf."
Overall, Chicago’s office market remains strong, with nine consecutive quarters of positive absorption, Zabielski says. Vacancies recently averaged 9.3 percent downtown, he says. "Downtown gross lease rates are up from , which started the rapid increase over historically low rates." Class A buildings downtown lease for about $27 psf to $30 psf, class B for $18 psf to $24 psf, and class C for $16 psf to $17 psf, he says.
In the near future, "Tenant demands will drive new development, which will push rents and acquisition costs up to replacement costs and beyond," Zabielski says.
Several major buildings in the city sold last year, including the Sears Tower for $850 million and the Merchandise Mart and Apparel Center for $575 million.
In the suburbs, about 1.5 million sf of space came on line in third-quarter 1998, Cushman & Wakefield reports; the Northbrook/Tri-State submarket saw 500,000 sf delivered, yet it had the highest net absorption of all submarkets.
Brian P. Hayes, CCIM, of Grubb & Ellis in Chicago focuses on Chicago’s west suburban office market. "DuPage County is one of the fastest-growing areas in the country and the trend shows no signs of abating," he says. "The vacancy rate for class A office properties is just 6.1 percent. The overall rate for all property types is 6.7 percent. Rental rates have risen dramatically as a result, nearly doubling over the past 30 months."
If the economy remains healthy, Hayes says, "the office segment should continue to grow, but at a much more modest rate than the past few years. The new development is being absorbed at a good rate and rent increases in line with inflation are probably sustainable." However, he says, if the economy falters, "All bets are off."
"The industrial marketplace has been extremely active during the past three to four years," reports Steven Goode, CCIM, SIOR, of Podolsky Northstar Realty Partners in suburban Chicago. "Vacancy rates are below 10 percent, and there is very little vacant land available for development that is not already controlled by developers."
Albert Schulman, CCIM, of Paine Wetzel in Chicago, concurs. "Many companies are looking to buy, and [there’s] not much inventory to choose from," he says.
Schulman reports industrial lease rates of about $4 psf gross in the city and $5.25 psf gross in the suburbs. Sales prices run about $25 psf in the city and $45 psf in the suburbs, he says.
Manufacturing and logistics companies are expanding, McCourt notes. New industrial construction recently had increased by 35 percent over the same period a year ago, he says. "New construction will continue to be active, given the strong demand for newer buildings with the modern amenities, such as off-street loading, exterior docks, ... sprinklers, and high-cube space," McCourt says.
Goode says he expects the market to continue to grow. "But, we anticipate a little slowdown to this extremely fast-paced market," he says. "Hot areas will be DuPage County and the I[nterstate]-55 corridor."
"Retail construction is active all throughout metropolitan Chicago, with a total of 5.5 million sf of retail development under construction," reports Marc A. Boorstein, CCIM, of MJ Partners Real Estate Services in Chicago.
For instance, Disney plans to open a flagship store on North Michigan Avenue, sharing a building with a new Saks Fifth Avenue. A Disney Quest indoor virtual amusement park and an ESPN Zone interactive restaurant and bar will join a new Nordstrom store in a John Buck development nearby, he says. In addition, new activity is occurring in the city’s State Street corridor.
Vacancy rates for North Michigan Avenue’s "Magnificent Mile" run only about 1.3 percent, Boorstein says, while neighborhood and community shopping centers run 9.3 percent. Rents average $17.14 psf for strip centers, $18.20 psf for neighborhood centers — and $61.09 on North Michigan Avenue — he says. Average sales transactions for class A-anchored shopping centers that are not enclosed average $110 psf to $120 psf.
Chicago-area retail construction will continue to add about five million sf per year over the next couple years — a sustainable level, Boorstein says. "Large retailers are increasingly looking for opportunities outside regional malls. Main-street locations in suburban downtowns can offer lower operating expenses and greater profit margins." One example is the new Saks Fifth Avenue Main Street store slated for downtown Highland Park, he says.
Charles Hold, CCIM, of Inland Real Estate in Oakbrook, Ill., calls the area’s multifamily segment strong, "with multiple purchasers for any multifamily properties that are for sale." Prices are up 10 percent in the past year, he says. For instance, class B and C apartments recently have sold for $55 psf to $60 psf. Lease rates run $1.10 psf for class A properties and 85 cents psf for class B and C.
Vacancies at the 16,000 units his company owns are about 4 percent, Hold says. New construction is "limited to class A spec buildings," he says, and also is limited by a shortage of multifamily-zoned land.
Tom Vincent, CCIM, of Sentinel Realty Advisors in Rolling Meadows, Ill., agrees that new construction will be limited to upscale projects or to rehab projects for condo conversions and affordable housing.
"Rents in Chicago will increase because many properties are being converted to condo usage," he says, adding, "Rents in outlying areas tend to follow rent increases in Chicago."
The Chicago area’s "hotel development is occurring at unprecedented levels," says George W. Sargeant, CCIM, of Sargeant Realty Advisors in Chicago. "It is not uncommon to see three to five hotels under construction at any given location." Little supply was added between 1990 and 1996, he says, and new segments have entered the market, such as extended-stay hotels. However, "I suspect the market will become overbuilt," he concludes.
Steady in Albuquerque, N.M.
In looking at the main property segments in Albuquerque, N.M., consider that the state has a gross-receipts tax on goods and services that can be a negative when trying to attract industry, says Bruce Marvick, CCIM, of Building Interests in Albuquerque. "And, general income taxes are high as compared to the surrounding area. However, the property taxes are much lower, which is an advantage regarding the real estate."
Albuquerque’s retail market has been very active for grocery-anchored and power centers, reports independent local broker Steven J. Quant, CCIM. In addition, "Indian gaming is having a very significant impact on the retail market," he notes, "especially restaurant, general merchandise, and entertainment" properties.
Retail lease rates run from the "high teens" to the low $20s psf for new developments and between $6 psf and $15 psf triple net for existing older properties, he says.
Looking forward, Quant expects to see the retail market "generally softening, except for new build-to-suit construction in prime areas."
The local office market saw less activity in 1998 than in past years, but remained fairly steady, says Linda Hartley, CCIM, of CB Richard Ellis in Albuquerque. "Projections are for a flat market in 1999," she adds.
Lease rates run $14.50 psf to $19.50 psf, while some multitenant investor property sales range from $55 psf to $95 psf, depending on building age and location, Hartley says.
"General industrial activity consistently has been good for existing buildings" in the Albuquerque market, Marvick says. Of the 33.5 million sf of industrial property in place, the vacancy rate recently was 7.3 percent, he says. "There are a number of new buildings being constructed as build-to-suit facilities, which does create available space in older buildings as those tenants move from older existing facilities to new ... facilities."
The multifamily market, which had slowed slightly in recent months, "is showing definite signs of improvement," says Joe Azar III, CCIM, of Grubb & Ellis Lewinger Hamilton in Albuquerque.
Class A apartment lease rates run 80 cents psf to $1 psf, while class B and C rates run 50 cents psf to 80 cents psf. Sales prices run near $50 psf for small properties and $35 psf to $50 psf for large ones, Azar says.