An economic downturn does not mean that real estate development stops. In every metropolitan area, even now, there are property types that are surging, submarkets that are growing and mega-projects that are proceeding. Heartland Real Estate Business asked six real estate professionals throughout the Midwest about what is currently making headlines within the development communities of their respective metropolitan areas. The interviewees were:

• Cincinnati: Kevin Hughes, Executive Vice President, Director of Brokerage Services and Managing Principal of Cincinnati/Dayton for St. Louis-based Colliers Turley Martin Tucker;

• St. Louis: J. John Reis, Regional Director, St. Louis office, Insignia/ ESG;

• Kansas City: Ted Murray, President, Grubb & Ellis/The Windbury Group;

• Milwaukee: James Barry III, President, James T. Barry Company/Colliers International;

• Detroit: Steve Chaben, Vice President, Investments, Marcus & Millichap’s Detroit office; and

• Chicago: Peter Block, Director, Cushman & Wakefield’s Chicago office.

Cincinnati

The Cincinnati metropolitan area continues to suffer from a glut of available space, particularly in the sub-lease market. Little has been built since the beginning of 2001, and, given the amount of space that still needs to be absorbed, new product will not be justified until at least 2004. On the other hand, stock market volatility has caused capital to turn its attention to more predictable real estate investments, particularly those sector types, such as industrial and multi-family, that are considered more stable. Sellers are becoming more realistic on price. Increasingly securitized, today’s property owners are anxious about the short term, and with their holdings having declined in value and recovery seeming far away, they are willing to come to the table.

One of the highest-profile efforts underway in the region is the redevelopment of the area known as The Banks, between the CBD and the Ohio River (see inset box on “Downtown Development Trends, Pages 36-37”). The other major story is the 1998 opening of the new Union Centre Boulevard/I-75 interchange to the north of the city and 2 miles north of the I-275 outer beltway, in the fledgling West Chester submarket. Funded largely by private developers, the new Exit 19 provided access to a relatively flat and largely undeveloped portion of the metropolitan area and spurred the construction of new office product (mainly by Chicago-based Higgins Development) and support commercial (e.g. hotels, restaurants, etc).

This area has also seen explosive residential growth in the last decade, with the likely result that the retail offer will soon assume more of a destination character. The sub-market, however, will be unable to support more than one major center, with the prize going to that development which is able to open first. Columbus, Ohio-based Continental Real Estate Companies appears to have taken the early lead, having already started construction The Streets of West Chester, an open-air town center at the southwestern corner of I-75 and Union Centre Boulevard that will also include retail, restaurants, offices and apartments.

St. Louis

The submarket making news in the St. Louis metro area is St. Charles County, now the fastest-growing in the state. New commercial development has been triggered by: 1) a diversified labor pool resulting from the affordability of the new homes; and 2) the decision by two major corporations, MasterCard International and MCI/WorldCom, to occupy 500,000-square-foot blocks of office space in the county.

MasterCard is opening its Global Technology and Operations Center at WingHaven, a new master-planned, mixed-use community under construction on 1,100 acres of farmland in the St. Charles County municipality of O’Fallon. The project, initiated and master-developed by St. Louis-based McEagle Development, will ultimately include 1 million square feet of office space, 400,000 square feet of retail space, 2,000 residences and a 18-hole golf course/country club. Although the bulk of the development will be laid out in accordance with suburban single-use principles, 26,000 square feet of the retail space will be contained within a Main Street district called Broadway Market Place.

The more established submarkets of Clayton and West County remain as attractive as ever. Three new high-rise office towers — The Plaza in Clayton, Shaw Park Plaza, and the Merrill Lynch Building — opened in Clayton in 2001. West County witnessed the September opening of a 1.2 million-square-foot enclosed regional mall, Westfield Shoppingtown West County, at the intersection of Manchester Road and the I-270 beltway, in the town of Des Peres. Two of the center’s anchors — Nordstrom and Galyan’s Sporting Goods — are new to the St. Louis market, and the developer, Los Angeles-based Westfield America, also expects the tenant mix’s higher-end orientation to draw shoppers who have long been forced to drive to Chicago for upscale shopping.

St. Louis-based TRiSTAR Business Communities is selling developable land or developed facilities to distributors at its 2,300-acre Gateway Commerce Center, on the Illinois side of the Mississippi River, along I-270 in the Madison County municipality of Edwardsville. So far, 2.8 million square feet has been built, with total build-out expected to approximate 25 million square feet.

Kansas City

In the Kansas City metropolitan area, many property types are struggling. The office and industrial sectors are presently challenged with high vacancy rates of 20 percent and 10 percent, respectively. Upper-end markets are suffering from overbuilding and moderate oversupply, and construction of the typical 200- to 400-unit multifamily complexes has slowed dramatically. Even South Johnson County, long the metro’s foremost suburban submarket for all property types, is contending with 25 percent vacancy and declining rents in its 12 million-square-foot office market, due to a significant extent to downsizing at Sprint.

The market remains strong throughout the metropolitan area for two interdependent property types: the single-family home and suburban-style retail.

South Johnson County clearly retains its attractiveness, with a new 1.25 million-square-foot hybrid mall, The Walk at High Pointe, planned by Leawood, Kansas-based Copaken, White & Blitt at the intersection of 135th Street and Metcalf Avenue, in Overland Park. Growth is no longer confined to South Johnson County, but has now spread also to the I-29/Barry Road vicinity (northwest of the city), eastern Jackson County (due east), the I-35/Liberty area (northeast) and the I-435/I-70 interchange (southeast).

The I-435/I-70 interchange submarket is perhaps the most notable. Its sleepy character was changed forever in 2001 with the opening of the Kansas (NASCAR) Speedway, which has spurred the development of a 400-acre district known as Village West. Owned and master-developed by the city of Kansas City, Kansas, this shopping/ dining/entertainment precinct will include a new minor league ballpark; a Great Wolf Lodge resort; a 580,000-square-foot Nebraska Furniture Mart; a 188,000-square-foot Cabela’s Sporting Goods; and a 600,000-square-foot, open-air, pedestrian-oriented shopping center to be known as The Legends at Village West, being developed by Kansas City-based RED Development.

With a number of large-footprint nationals (Wal-Mart, Kohl’s, The Home Depot, and more recently, Target and Lowe’s Home Improvement) active in the market, most of the retail development has taken the form of big boxes. A notable exception, and one that is expected to provide a focal point for an area that has none, is Zona Rosa, a mixed-use Town Center currently under construction at the intersection of I-29 and Barry Road, in the Northland sub-market. This project is being developed by Columbus, Ohio-based Steiner + Associates.

Milwaukee

The Milwaukee metropolitan area has weathered the recession well, with no massive layoffs and no glut of space that needs to be absorbed. Furthermore, existing buildings in the CBD and in urban suburbs such as West Milwaukee and West Allis are seen as well-positioned going forward. Much of the activity today focuses on downtown (see inset box on Downtown Development Trends), as well as the few remaining suburbs with short commutes.

An example of this is the development of the Pabst Farms tract, on both sides of I-94 at the far western edge of the metropolitan area in the municipality of Oconomouoc. This development consists of a number of farms owned by beer’s famous Pabst family and is being developed by Pabst Farms Inc., headed by Peter Bell, a Chicago-based developer. Plans call for multiple-use, suburban-style development that will include industrial and office parks comprised of single-tenant buildings, retail development, and single-family homes. Residential construction has already started.

Milwaukee remains an industrial city. This use accounts for 220 to 250 million square feet of space in the metropolitan area, translating to a high per-capita figure. The overall vacancy rate has almost doubled in the last 2 years, but the current 7 to 8 percent is still low compared to other areas nationwide, and is considered a product of the current business cycle. The market is not tremendously overbuilt, so current overcapacity is slight. Recovery is already thought to have started, and levels are expected to drop below 5 percent again soon. Germantown Industrial Park, in the municipality of Germantown, is currently being expanded by Milwaukee-based Skyline Development Corporation.

Heavy industry, such as manufacturing, printing and machine shops, is increasingly giving way to “light” industrial and warehouse/distribution uses, resulting in a greater preference for modern suburban-style industrial parks versus older multi-story buildings. Evidence of these shifts can be detected in the redevelopment plans for the Menomonee Valley in the CBD (see inset box on Downtown Development Trends).

Detroit

The Detroit metropolitan area is struggling across all property types. Commercial leasing, in particular, is very soft, and is expected to remain so for a while, due to a significant extent to overcapacity. A number of developments that were initiated in the boom years of the late ‘90s opened in 2001 and 2002 and have flooded the market with available space. Investment sales, on the other hand, are doing well: demand is high because of low interest rates and stock market volatility. Inventory is low due to the buy-and-hold mindset in this market.

Two submarkets are seeing development of high-tech flex space with some office, as well as new residential, with retail soon to follow. These are: the Interstate 96 corridor in Oakland County as it heads west toward Wixom, and the Interstate 275 area in western Wayne County from the border with Oakland County to the municipality of Wayne, in emerging communities such as Northville, Plymouth and Canton.

Also, Wayne County, in partnership with Northwest Airlines, opened the Midfield Terminal (also known as the Edward H. McNamara Terminal at the Northwest WorldGateway) at Detroit/Wayne County Metropolitan Airport in February 2002. The surrounding area, although removed from the metro’s commercial flow, will likely be treated to some typical airport-related development, such as warehouses, offices and flex space. Importantly, airport-bound vehicles will now enter the facility from I-275, not I-94, which will impact traffic patterns and site location decision-making.

Chicago

Except for the CBD (see inset box on Downtown Development Trends), Chicago is reeling from the economic downturn. But with its central location, it can still count on its status as a preeminent distribution hub. The southwestern fringe, which offers available land and closer proximity (compared to other sub-markets) to trans-continental routes, is especially well-positioned in this regard. Enormous distribution facilities — suburban-styled, single-story, and 600,000 to 1 million square feet in size — have proliferated in the Interstate 55 Corridor/Bolingbrook area over the last 5 to 10 years and are expected to continue to do so in the future.

Chicago-based CenterPoint Properties Trust has assumed the role of developer of the redevelopment of the 23,000-acre Joliet Arsenal, in the city of Joliet even further to the southwest. It has just opened a third-largest container port in the world, a 621-acre, state-of-the-art, inter-modal facility that will be used for the transfer of goods between trucks and trains. The project will also include 17 million square feet of warehouse/distribution/light manufacturing space, and 55 acres of truck-oriented commercial. In addition, the state has selected a 23,000-acre site 20 miles to the east for the metro’s third commercial airport, which would add yet another form of transportation to the multi-modal mix at Joliet.

Joliet presents just one example of how the Chicagoland area is reaping the benefits of the so-called “peace dividend.” In the North Shore suburb of Glenview, the former Glenview Naval Air Station is being redeveloped by the Village into The Glen, a 1,100-acre master-planned community with a town center, residential neighborhoods, a business park, two strip centers, two golf courses, a children’s museum, a public park/recreation center, and a commuter rail station (see article on “The Glen” in the November 2002 issue of Heartland Real Estate Business.)

Michael J. Berne is the principal of MJB Retail Consulting.

Downtown Development Trends Michael J. Berne Given that city centers have returned to prominence, Heartland Real Estate Business felt that the real estate professionals from the six subject midwestern cities should be asked to comment specifically on what is happening in their downtowns. Cincinnati Actual projects in Cincinnati have focused on entertainment/recreation. The emerging district, known as The Banks, will be bracketed by the publicly financed Paul Brown Stadium, where the Cincinnati Bengals football team started playing in 2000, and the publicly financed Great American Ballpark, which will open next spring as the home of the Cincinnati Reds baseball franchise. These two new venues are replacing the soon-to-be-demolished Cynergy Field (formerly known as Riverfront Stadium). In the middle, the future home for the National Underground Railroad Museum is currently under construction. As for the remainder, mixed-use development is envisioned, including office, hotel, restaurant, residential and park uses, as well as some support retail. Most notably in this regard, Convergys, a telecommunications concern, is contemplating a 700,000-square-foot headquarters/call center operation, with plans to expand to 1.1 million square feet. St. Louis The central business district (CBD) has not received much attention from the development community in recent years. There are no specific plans for the regeneration of St. Louis Centre, the enclosed mall at Washington Avenue and Sixth Street. Moreover, there is only one major project — New Orleans-based Historic Renovations’ renovation/expansion of a hotel on Washington Avenue into the 1,000-room Renaissance Hotel by Marriott and conversion of the adjacent Merchandise Mart into 213 apartments. While little is actually happening in the central core, a number of planning efforts are underway. Private interests are working feverishly on plans for a new ballpark (and a Wrigleytown-esque Ballpark Village) close to the existing Busch Stadium — the Cardinals are currently being courted by suburbs both to the west and on the Illinois side of the Mississippi River. Meanwhile, many parties are involved in St. Louis-based Desco Development’s planned redevelopment of the Victorian-era post office at Olive and Eighth streets. The Missouri State Court of Appeals and Webster University are envisioned as anchors of the new Post Office Square, which would also include some office and retail as well as a parking garage across the street. Kansas City At the moment, there is not a large amount of commercial activity in the downtown loop. A major performing arts center, to be located at 16th Street and Broadway on the loop’s southern border, is in the preliminary design phases and enjoys strong financial backing. City officials and business leaders are also focusing on growing the residential population, in the hope that more in-town households will ultimately translate to a stronger retail component. The goal is an annual increase of 1,000 units (versus a historical average of 200 to 300 per year). Developers have responded by converting a number of mid-rise office buildings (there has been little ground-up development) for both rentals and condominiums. So far, the demand has been strong, particularly for the for-sale product. Not surprisingly, the market is dominated by relatively affluent young professionals and empty nesters. The area south of the loop, between downtown and Union Station, has recently seen a large amount of loft development. Known as the Crossroads District, it is fast emerging as the trendy part of town, with new restaurants and galleries, studios and live/work space for artists, and offices for businesses. Milwaukee This CBD is moving in a number of positive directions (for reasons discussed in the main article). There has been a significant amount of in-town residential development, with approximately 3,000 units either built recently or in the planning stages. Roughly 75 percent of the new residences are the result of ground-up development, although older office/warehouse buildings have also been converted. In a similar vein, loft office space is being created from older multi-story industrial structures. At the same time, new restaurants, bars and theaters have appeared. The city is also pushing for mixed-use in the CBD, and is excited about Milwaukee-based Joel Lee’s Cathedral Square, a building under construction at Wells Street and Van Buren Street that will include condominiums, offices and a parking structure and represents downtown’s first true mixed-use building development in some time. The Shops at Grand Avenue, a downtown enclosed mall on West Wisconsin Avenue, appears to be successfully repositioning itself to attract higher-quality retailers after a half-decade of decline. As part of its redevelopment, Charlotte, North Carolina-based Faison & Associates has renovated the interiors and is on the verge of signing three major tenants. Others are clearly taking notice: Borders Books & Music has signed a lease in the ASQ Building next door (the former Marshall Field’s department store), and The Boston Store agreed to a new 10-year operating covenant for its space on the other side. The city is also spearheading two large-scale redevelopment efforts in blighted/underutilized portions of the CBD. The Park East Freeway (State Hwy 145) will be demolished, and the 26 acres underneath it, currently used for parking lots, will be divided and sold by the city to developers for the uses designated in a master plan that the city unveiled in November. Office, retail and entertainment are envisioned. The second redevelopment is the Menomonee Valley in the southeastern portion of downtown. One of the city’s oldest industrial areas, it currently contains a combination of multi-story buildings. The city, buoyed by the fall 2000 opening of the Potawatami Bingo Casino on West Canal Street, is using its powers of eminent domain to acquire 140 acres of former railyard presently controlled by Chicago-based CMC, and has also installed a new north-south road/bridge, the 6th Street Viaduct. In addition, the state has allocated funds to develop Canal Street as a major east-west street. It is hoped that this will spur 30 to 50 acres of redevelopment, from heavy to light industrial, with some office and retail. Detroit Finally, there seems to be some reasons for optimism in downtown Detroit. New residential activity is scattered about, on the Detroit River and in the heart of the CBD. Multi-story warehouse buildings have been renovated for rentals and for-sale product, and rentals elsewhere are being converted to condominiums. The northeastern portion of the CBD has emerged as a destination for evening events. The Illitch family, owners of the Little Caesars pizza chain, jump-started the process a decade ago by rehabilitating an old theater and reopening it as the Fox Theatre, for live theater and various entertainers. Then, 2 years ago, the Detroit Tigers baseball franchise, owned by Mike Illitch, started playing in the new Comerica Park. This season, the Detroit Lions football team, formerly of the suburban Pontiac Silverdome, inaugurated its new stadium, Ford Field, next door to Comerica Park. The area has also seen some spin-off, in the form of restaurants and a comedy club. The three casinos, which opened in 1999 and 2000, remain a hot topic, with discussion focusing on where they will be permanently located. The previous mayor, Dennis Archer, had wanted the new casino/hotel complexes to be clustered near the river, just north of the General Motors headquarters on Jefferson Avenue. Due to environmental issues and the high cost of the land, the City was unable to deliver a site. The casinos are now acquiring sites and reducing the size of their projects. MGM Grand has settled on a location, and will remain in the area of its temporary facility, on the northwestern fringe of the CBD. The other two — MotorCity Casino and Greektown Casino — are still undecided. The office market is presently celebrating one huge victory. Following a generation of office users fleeing to the suburbs, CompuWare, a computer hardware/software concern, is moving in the reverse direction, relocating its operations from Farmington Hills, in the heart of the metropolitan area’s premier suburban Class A office location, to a new downtown campus on Woodward Avenue, just a few blocks from the river in the heart of the CBD. CompuWare’s new building, which will encompass 1.1 million square feet and house at least 3,000 of its young and highly-paid employees, is currently under construction. It is the first piece of the Campus Martius project, a multi-block, mixed-use development by Detroit-based Kern Woodward Associates, LLC that will consist primarily of Class A office space and include retail, hospitality, and a park. Chicago Most of the development activity in the Chicagoland area is taking place in the CBD, which is thriving. The West Loop, which runs from Wells Street roughly to Jefferson Street on the other side of the Chicago River, has seen the majority of the office development during the last 10 to 15 years, due to the growing importance of commuter rail (Union Station sits on West Adams Street, on the western bank) and the availability of land. In fact, two new projects have just been announced in the West Loop. At the southeast corner of Wacker Drive and Adams Street, Chicago-based John Buck Company is planning a 50-story, 975,000-square-foo. tower, which will be anchored by Deloitte & Touche. At the northeast corner of the same intersection, Chicago-based Pritzker Development and Chicago-based Higgins Development will be building the 47-story, 1.5 million-square-foot Hyatt Center, with tenants that include the Hyatt Corporation, Mayer Brown Platt and Rowe (a multi-national law firm) and Goldman Sachs. The ground floors of these buildings will be used for parking, not retail. This reflects a trend among office users in the West Loop, which want their buildings to have an institutional look and project a corporate image. In the last 5 years, there has been an unprecedented amount of housing development to the immediate north and west of the CBD, in the River North and West Loop/Westgate neighborhoods. Both of these areas used to consist primarily of manufacturing uses, but became thoroughly residential in the ‘90s. While growth has been explosive, both areas still have land available for further development. River North is composed almost entirely of new high-rises and townhomes, with the majority of units selling for $300,000 and up, while West Loop/Westgate is characterized by a lower-density stock of mid-rises and townhomes, with a few more conversions and somewhat more affordable. Not surprisingly, the former is populated by an affluent and more established crowd, with empty nesters and thirty-somethings, while the latter, which includes the campus of the University of Illinois-Chicago, is younger and somewhat more diverse. — Michael Berne

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