Centre Point Office Park, located in Cincinnati and consisting of three 120,000-square-foot buildings, is currently 90 percent occupied.

With job growth expected to buoy an overall stagnant economy, Midwest brokers look optimistically toward 2004. Heartland Real Estate Business recently spoke with several brokers regarding their outlooks on office, industrial, retail and multifamily activity in major Midwest markets.

Office

A slow 2003 job market contributed to Indianapolis’ relatively stagnant office market, according to Jeffrey Henry, managing principal at Colliers Turley Martin Tucker in Indianapolis. The office vacancy rate, which stands at 18.8 percent, has remained fairly stable throughout the year. Space has come on the market as some companies downsize and vacate space, but companies continue to lease previously existing vacant space, keeping vacancy rates consistent.

On the positive side, the Indianapolis office market has absorbed about 270,000 square feet year-to-date. In addition, several submarkets experienced solid growth during 2003 including downtown, midtown, and the northwest and south submarkets.

Overall, these areas experienced about 300,000 square feet of new development this year. Five significant office projects have been completed in Indianapolis: Eight Parkwood Crossing (189,000 square feet); Interactive Intelligence (120,000 square feet); Allen-Christy (60,000 square feet); 8365 Keystone Crossing (60,000 square feet); and Epler Parke II (34,300 square feet).

Henry expects the Indianapolis office market to continue to be a tenant market through 2004. The good news is that the pendulum should slowly start to swing back toward landlords by the end of 2004.

The office market is faring a little better in St. Louis. The vacancy rate is currently 15.7 percent, according to David Thiemann, managing principal at Colliers Turley Martin Tucker. In addition, much of the sublease space has been absorbed, and primary vacancy is a result of leases that have expired or newly built space that has not yet been leased. Year-to-date absorption in the office market is 129,000 square feet, or 0.3 percent, Thiemann says.

Cincinnati-based Ackermann Group is developing Cornerstone at Norwood located in Norwood, Ohio. The project consists of two buildings totaling 250,000 rentable square feet.

New office projects include CitiMortgage, which recently occupied its 570,000-square-foot headquarters in St. Charles County. The Clayton submarket continues to attract potential developers. In fact, developers have announced projects for St. Louis that will add nearly 1 million square feet of office space by the end of the decade.

The downtown Chicago office market has seen reduced sublease space. During the third quarter, the sublease vacancy rate decreased by more than 13 percent to a little more than 2.75 million square feet, according to Ted Holman, vice president in the office brokerage group of Oakbrook Terrace, Illinois-based NAI Hiffman. “Though still above its historical average, sublease space is slowly burning off through term expiration, buyouts and some leasing,” Holman says.

Vacant space abounds in the Chicago market. The central business district alone offers approximately 18 million vacant square feet, both direct and sublease space, says Michael O’Hanlon, senior vice president and managing director of the north central region for Grubb & Ellis’ Chicago office. Overall, downtown vacancy dropped from 16.28 percent in June to 16.05 percent in September due to positive net absorption in River North as well as in the West and Central Loop submarkets, according to Holman.

Chicago’s suburbs haven’t fared much better. “The suburban sector has been experiencing the fallout of corporate downsizing, consolidation and a spate of bankruptcies,” O’Hanlon explains. “Vacancies are up, and negative absorption plagued the market during the second half of the year. In the suburbs, there is in excess of 23 million vacant square feet of direct and sublease office space.”

According to Dan O’Neill, senior associate in NAI Hiffman’s office brokerage group, Chicago’s overall vacancy rate increased from 22.82 percent at midyear to 23.26 percent at the end of the third quarter — mostly due to Zurich International and Motorola vacating the northwest suburban market. Only the East-West corridor recorded positive absorption in the suburbs during the third quarter.

“Activity and deal announcements, however, speak of a brighter fourth quarter for certain areas,” O’Neill says. “Currently, the North suburban office market has the lowest overall vacancy at 19.27 percent, though leasing activity remains slow. At the other end of the spectrum lies the O’Hare area, where a flurry of new leases should help to drop its current 27.01 percent vacancy in the coming months.”

Most major new office construction in Chicago is downtown. Prime Group completed its 1.3 million-square-foot Bank One Corporate Center at 131 South Dearborn in the Central Loop. Projects currently underway in the West Loop include ABN AMRO Plaza (1.3 million square feet), Hyatt Center (1.3 million square feet), and 111 South Wacker (about 1 million square feet). Hines is also set to begin work on its 800,000-square-foot project in the Central Loop. The law firm Sidley Austin Brown has pre-leased approximately 500,000 square feet in the project, which is scheduled for completion in March 2006. In addition, the 1.4 million-square-foot Dearborn Center was completed in the CBD. Anchor tenants include Bank One, Citadel Investment and Holland & Knight.

Probably the best news for the Chicago office market is that the investment market remains promising due to low interest rates and sporadic returns offered by other investment alternatives. “Capitalization rates for prime buildings in the CBD continue to average around 8 percent, down from the 9.5 percent average several years ago,” O’Hanlon says.

Holman expects the 2004 office market to be similar to 2003. “Leasing velocity will pick up, but rents will remain flat at best,” he says. “Landlords will continue to offer concession packages to attract tenants to their buildings. The only thing that will bring change to the market will be a sustained economic recovery with accompanying job growth.”

In Omaha, Nebraska, the approximately 14.1 million-square-foot, owner-occupied office market is experiencing overall availability of about 2.6 million square feet, according to Nancy Johnson, principal with Omaha-based Lund Company. Additionally, the sublease space on the market has increased to about 337,000 square feet from about 279,000 square feet 6 months ago.

This year’s biggest Omaha office projects have centered around the Riverfront Development, such as the $280 million Qwest Arena & Convention Center. According to Johnson, economic indicators point toward a slow but steady recovery next year. “I see the sublease office market declining and being absorbed in 2004,” she says.

Metropolitan Detroit also posts high vacancies — 21 percent — and, for the first time in quite awhile, Southfield and Troy’s vacancy rates top the city of Detroit’s. Two relocations have had a major effect on the Northwestern (Southfield/Farmington Hills) office market, according to Andy Farbman, president of Southfield, Michigan-based NAI Farbman. EDS moved from Southfield to the Renaissance Center, and Compuware moved its headquarters from Farmington Hills to Detroit.

In addition, overseas auto corporations have begun to acquire property in the Detroit area and may bring many jobs to the state of Michigan. Farbman also expects the market to improve because sublease space will begin to expire, and many tenants will be forced to relocate. However, landlords will continue to be very aggressive, he says.

The Columbus, Ohio, office market is feeling the effects of speculative space, an 800,000-square-foot vacancy left by Bank One, and the events of September 11, 2001. Consequently, Columbus is still trying to recover to a normal occupancy rate, says Tim Treasure, office and medical leasing specialist for Columbus-based NAI Ohio Equities. “Current vacancy rates are about 22 percent for the suburbs and the CBD combined,” he says.

However, the Arena District, a submarket of the CBD, has drawn major tenants from central downtown because of its many amenities and room for growth. The area is home to the Columbus Blue Jackets (Columbus’ NHL hockey team) and many restaurants. “This submarket experiences an occupancy rate of almost 92 percent,” Treasure says.

Looking ahead to 2004, Treasure predicts that tenants will take advantage of the growing office condo space. And if interest rates increase, then sales activity will also increase. “Provided absorption can catch up with supply, tenants will no longer drive the deal,” he says. “If developers can control spec construction, and if no further disasters occur, then Columbus will be able to regain its position as a strong commercial Midwest market.”

Vacancies in the Madison, Wisconsin, office market seem to have stabilized in 2003, according to John Henderson, senior vice president of Brookfield, Wisconsin-based NAI MLG Commercial. “Large blocks of space continue to be vacant on the east, west and downtown areas of Madison,” he says. “Because of this glut of space, new construction has slowed down considerably; however, several new buildings are on the radar screen for the upcoming year.”

These projects include large business parks such as The American Center and Old Sauk Trails, which are seeking users from Madison and surrounding markets. Moreover, some large users like Alliant Energy and Telephone & Data Systems have vacated older facilities for improved locations, thereby leaving behind buildings in the downtown and west suburban markets, Henderson explains.

Office vacancies in northeastern Wisconsin have gone from about 9 percent during the past year to nearly 20 percent in some areas, according to Henderson. New construction, including spec office buildings, have historically met the previous demand; however, some areas are seeing sublease gray and dark space levels of 20 percent.

Most of Wisconsin’s woes can be attributed to the slow manufacturing climate. “As a state with the second highest percentage of jobs in manufacturing (behind Indiana), our industrial/manufacturing segment has been decimated,” Henderson says. “Overall, [2004] looks to be the same [as 2003] with slow improvement in all segments.”

Industrial

The Indianapolis industrial market has shown steady reductions in vacancy rates during the past two quarters, mostly due to several large, modern bulk occupancies. Industrial vacancy stands at 9.5 percent, and absorption in the overall industrial market is about 2.3 million square feet, says Jeffrey Henry, managing principal at Colliers Turley Martin Tucker in Indianapolis.

Major year-to-date completed projects include Opus V (552,000 square feet), Pattillo II (273,000 square feet) and CertainTeed Corporation’s facility (209,000 square feet). Three additional projects are scheduled to come online within the next 6 months. These include 381 Airtech Parkway (813,000 square feet), Brylane (741,000 square feet) and Quadrangle I (442,000 square feet).

The southwest, northwest, west and southeast submarkets, which have enjoyed steady growth throughout 2003, are poised to grow during 2004, Henry says. Companies are attracted to these areas because of their central location, generous economic incentives, and easy access to downtown Indianapolis and the interstates.

Industrial development has been active in Chicago, especially with speculative logistics centers in the Interstate 55 corridor and Central Will submarkets, says Michael O’Hanlon, senior vice president and managing director of the north central region for Grubb & Ellis’ Chicago office. “The pace of new build-to-suit development, especially for distribution centers, also remains brisk despite rather soft market conditions,” he says.

According to Jim Planey, principal with Chicago-based Lee & Associates, companies are taking larger distribution spaces because they are consolidating and closing down smaller distribution centers. “However, we have had a weak market for manufacturing,” Planey says.

At the end of the third quarter, the Chicago market posted a 10.8 percent vacancy rate in the industrial market, according to Tom Lotito, vice president of market research for Lee & Associates. “That number is based on a market size of about 930 million square feet. Last quarter, net absorption was negative 789,000 square feet, and gross absorption was about 10.9 million square feet.”

Central Will County, which runs south/southwest from Chicago to Joliet, is expected to be active in 2004 because of its strategic location to various transportation routes, aggressive economic leadership and attractive tax incentives, O’Hanlon explains. The I-55 corridor is also expected to grow because it features a favorable distribution network.

Planey also lists the Interstate 80, Interstate 88, Interstate 39 and Interstate 57 corridors as high growth pockets in the Chicago area. For example, CenterPoint Properties developed the Burlington Northern Santa Fe yard in Joliet at I-55 and I-88, and Union Pacific Global III Intermodal Facility has also come online this year at I-39 and I-88.

Companies have absorbed some of the vacant space on the north side of O’Hare Airport since the announcement of the proposed runway, North 9-27. Land prices around O’Hare have increased by about 20 percent in the past year due to the companies that have relocated and developers that have secured sites for industrial projects, O’Hanlon says.

According to Mark Goode, principal with Riverwoods, Illinois-based Venture One Real Estate, developers have been positioning themselves with land sites so that they will be able to react to industrial transactions in 2004 and 2005 when the market starts to recover. Companies are consolidating into large facilities that are 300,000 square feet or larger.

Investment activity in the Chicago industrial market has also been busy with a large amount of capital chasing available product. “With a lot of buyers in the market, and with low interest rates, it is a great time to have an investment property for sale,” Planey says.

“The industrial market easily outperforms all other sectors [in the Chicago market],” O’Hanlon says. He expects that 2004 will show slow and steady overall growth.

The industrial market in Detroit, however, does not seem to be faring as well. The vacancy rate stands at 13 percent, and it is growing due to a tightening automotive market, says Andy Farbman, president of Southfield, Michigan-based NAI Farbman. However, the good news is that investment activity has been strong for fully leased products. For example, Wells Real Estate Funds purchased 150 West Jefferson in Detroit and Koll Corporate Center in Auburn Hills.

The city of Detroit may soon be on the rebound, though, thanks to its pursuit of future tenants with the Michigan Economic Development Corporation (MEDC). The MEDC has been offering tax incentives, low real estate costs and strong in-place real estate.

In Cincinnati, companies have vacated more space than has been absorbed. However, during the third quarter, the area posted positive absorption for the first time this year, says Kevin Hughes, executive vice president of brokerage services for the Cincinnati office of Colliers Turley Martin Tucker.

“During the past year, vacancy has been in the 22 million- to 23 million-square-foot range,” Hughes says. “At the end of the third quarter, industrial vacancy was about 9.6 percent.” Speculative industrial development has slowed in response to this glut of available space. However, several build-to-suit projects are currently underway. The first phase of Cornerstone (30,000 square feet) in Norwood, Ohio, broke ground in October, and Gold’s Gym will occupy the space by October 2004.

Cincinnati’s investment product supply remains constrained despite buyer demand. “While many smaller investment deals are happening, few large deals have closed in 2003,” says Robert Alpern, vice president of Cincinnati-based NAI Eagle. These deals include The Alter Group’s $30.2 million sale of the 835,000-square-foot Toebben Drive warehouse (leased by Thompson Learning) to a private investor, and ProLogis’ purchase of World Park Center and World Park Plaza in Sharonville for $9.5 million.

According to Alpern, the airport and West Chester submarkets are poised for industrial growth in 2004 due to available land and access to highways. Hughes also expects the overall industrial market to improve in 2004. “Corporate earnings have improved, capital spending is on the rise and there is plenty of capital available,” he says.

As in Chicago and Detroit, the Dane County, Wisconsin, industrial market has also suffered due to the manufacturing downturn. “The market has seen a number of employers close facilities and/or relocate overseas,” Henderson says. “This shift has resulted in increased vacancies across the entire market and has put downward pressure on rents for the first time in 10 years.”

Retail

Retail activity in Chicago has been occurring at a regular pace, with most new developments centered around banks, according to Tyler Quast, executive vice president and principal of Chicago-based Zifkin Realty & Development. Retail investment activity has also been strong because of the capital chasing good retail opportunities. According to Quast, occupancy rates in the retail market are about 90 percent.

Quast says two of the most interesting retail projects underway this year are Geneva Town Center and Algonquin Town Center (both being developed by Jeffrey R. Anderson Real Estate). Zifkin is also developing The Shops at Beverly at 95th and Western, which could total 70,000 square feet when complete in 2004. Several Wal-Mart Supercenter and SuperTarget developments are also underway in Algonquin, South Elgin, Battavia, Shorewood and Antioch.

The fastest growing residential submarkets include the Randall Road corridor, from Algonquin down to Shorewood; Lake County in the northern suburbs; and Orland Park, Tinley Park, Lockport and Joliet in the southern suburbs. Retail is following.

The retail market in Cleveland has historically absorbed big box vacancies created by relocations, bankruptcies and users leaving the market. True to form, very little vacant space is available, says Ronald Markowitz, president of Cleveland-based NAI Ronald Markowitz Real Estate.

Lifestyle centers have been the newest developments in the Cleveland area. These include Crocker Park, a 1.7 million-square-foot center consisting of 600,000 square feet of retail space, 850,000 square feet of residential space and 250,000 square feet of office space; Legacy Village, a 600,000-square-foot center that opened in October; and Eton Collection, a 215,000-square-foot center opening in early 2004.

The market has anxiously awaited lifestyle centers and, as a result, the concept has performed well in the area, Markowitz says. Yet, in 2004, all of these centers will be operational at the same time and will adversely affect each other, as well as traditional centers and restaurants in their respective trade areas.

The unprecedented number of existing shopping centers being redeveloped in Milwaukee during the past year has dominated the market. For example, the former Capitol Court Mall has been razed to make room for the 300,000-square-foot Midtown Centre anchored by Wal-Mart. In addition, Mayfair Mall has benefited from the addition of more than 80,000 square feet of second-level retail and a P.F. Chang’s China Bistro.

The Madison, Wisconsin, area has continued to experience low vacancy rates and upward movement in rental rates, says John Henderson, senior vice president of Brookfield, Wisconsin-based NAI MLG Commercial. “New retailers continue to enter the market monthly, [and] the only constraint to this growth seems to be the availability of retail land and municipal red tape,” he says.

Retail growth in northeastern Wisconsin has also been strong with many national retailers entering the market including Pottery Barn, Coldwater Creek, Younkers and Scheel’s Sportsworld. Restaurants such as Texas Roadhouse, Noodles, Buffalo Wild Wings and Max & Erma’s are also expanding in the market.

Multifamily

According to Kenneth Goldberg, executive managing director for Chicago-based Sheldon Good Brokerage, Chicago’s multifamily occupancies have been lower than normal during the past 12 to 24 months because high unemployment and low interest rates have allowed renters to purchase homes. “Several areas, such as River North, the West Loop and the downtown/Streeterville areas, are suffering from over-building and a glut of new condominium units on the market,” Goldberg explains.

Valuations have continued to increase as low interest rates and fallout from poor stock market returns have kept the demand for real estate investments high. “Cap rates on multifamily rental properties have continued to dip as the demand and competition for this most stable of all real estate investments is ferocious,” Golberg says.

As in Chicago, multifamily occupancies across Wisconsin are currently 5 percent to 10 percent lower year-to-date due to low interest rates. Economic occupancy — the added cost of concessions on top of physical vacancy — is even lower, according to Mike Dean, director of the national housing group for Marcus & Millichap Real Estate Investment Brokerage Company.

Occupancy pressure started around August 2002 when the benchmark 30-year interest rate fell below 6 percent, Dean explains. “As renters started buying homes, the economy remained soft and job creation was low so no new households came into the market to lease apartments.”

The more affordable apartments have held up better to this new competition brought on by home purchases. “The Class B complexes have seen fairly good occupancy rates, while the top-end newer product has been hit with slow leasing traffic and high non-renewal rates as many of these tenants rent by choice and not out of necessity,” Dean says.

Buyer interest in multifamily investment is strong in Wisconsin. Net operating incomes have dropped for the last 2 or 3 years, but falling interest rates have compensated for this drop, thereby resulting in good prices for sellers, Dean notes. However, while capitalization rates are low, market underwriting is tightening.

Dean predicts that interest rates will increase from current levels. Job data from the state of Wisconsin suggest that some areas are recording job gains, which will lead to more household formation. As a result, new renters will enter the market. At the same time, interest rates will rise to reflect a stronger economy, which should reduce the exodus of apartment households into single-family homes. “Higher interest rates will bring better fundamentals to apartment investors,” Dean says.

Walpert Properties: High Ridge Crossings Shopping Center St. Louis-based Walpert Properties is currently developing High Ridge Crossings Shopping Center in High Ridge, Missouri. The 77,000-square-foot build-to-suit project for Shop ‘n Save grocery store will be complete in May 2004. “This project’s success is already evident by the fact that it is 100 percent pre-leased,” says Tony Bosworth, vice president of development with Walpert Properties. “In the St. Louis market, pre-leasing a shopping center before construction begins is extremely rare.” Signed tenants in the $10 million project include Premier Tan, Great Clips, Fortel’s Pizza Den and Blockbuster Video. The general contractor on the project is FiCon, and Lark & Associates is the architect.

Browning Investments: SouthTech Park In January 2004, Indianapolis-based Browning Investments will complete the first two buildings in SouthTech Park in Greenwood, Indiana. The two 81,000-square-foot buildings, which are located near the Interstate 65 and East Main Street interchange, are designed to appeal to mid-size distribution users. The buildings have been granted 10-year real estate tax abatements.

The Bristol Groupe: Wakarusa Corporate Centre, Phase II Wakarusa Corporate Centre, Lawrence, Kansas Lawrence, Kansas-based The Bristol Groupe plans to start Phase II of the Wakarusa Corporate Center in Lawrence in the first half of 2004. The new phase, which is scheduled for completion in 2005, will be a 75,000-square-foot, speculative office building. The company completed Phase I of the technology and life sciences campus in 2002. When Wakarusa Corporate Centre is fully built out, it will total 300,000 square feet of space and will be valued between $30 million and $40 million.

Copaken, White & Blitt and Highwoods Properties: Plaza Colonnade In Kansas City, Missouri, Copaken, White & Blitt and Highwoods Properties are less than 1 year away from finishing the Plaza Colonnade. When complete in November 2004, the $70 million mixed-use development will feature a 270,000-square-foot office building, 8,600 square feet of retail space, a 50,000-square-foot library and a 1,300-space parking garage. “[The Plaza Colonnade] has an incredible presence in the highest occupancy, highest rent submarket where land is scarce,” says Jon Copaken, director of development with Leawood, Kansas-based Copaken, White & Blitt. The project, which is located at the intersection of 49th and Main streets, started when the library that owned the property sent out a request-for-proposal on the site. “They wanted to see if a private developer could come up with a great way to enhance the site, build a new library and create a facility that the city would enjoy,” Copaken says. The project is already showing signs of success with 60 percent of the office portion pre-leased to Blackwell Sander Peper Martin and RSM McGladrey. In addition, an 8-story condominium building is planned for the future.

Slawson Companies: New Market Square, Phase II The Slawson Companies is currently developing a 425,000-square-foot second phase to New Market Square, located at 21st and Maize roads in Wichita, Kansas. A SuperTarget will anchor the new phase when it opens in fall 2004. Other new features include 35,000 square feet of retail space flanking a plaza and fountain, landscaped terraces, a stage for outdoor concerts, a small lake, second-story loft office space and contemporary Main Street architecture. The first phase of the shopping center, which is 433,000 square feet, was completed in 2001. It is anchored by a Wal-Mart Supercenter, Bed Bath & Beyond, Borders Books & Music, Old Navy and Gart Sports.

Sachs Properties: Park & Main In 2004, Sachs Properties will break ground on Park & Main, a $25 million, mixed-use project in Chesterfield, Missouri. The pedestrian-oriented Park & Main will feature 26,000 square feet of retail space for shops, restaurants and cafés with patios; 200,000 square feet of office space in two buildings; and a landscaped reading garden with benches, trees and sculptures. Upon completion, the commercial segment of Park & Main will have seven buildings. The project is the first phase of a $200 million plan to create a downtown in Chesterfield. Subsequent phases will involve residential, retail and office development on more than 100 adjoining acres. Park & Main is a culminating phase of Chesterfield Village, a master planned, 1,500-acre community.

©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.