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FEATURE ARTICLE, DECEMBER 2009
DEVELOPER OUTLOOK 2010
Amy Bigley
As 2009 comes to a close, brokers and developers are keeping their eyes set on a real estate market rebound in the new year. Although there are mixed results throughout the Midwest markets, all cities are looking forward to more stable development and financial environments to boost local economies.
Indianapolis
Indianapolis’ office market conditions held steady through the third quarter of 2009, which shows signs that it is handling the challenges of the economic downturn. The most challenging aspects have been the increasing vacancy rate, the rise in tenant defaults and negative occupancy. An increase in sublease space has resulted in downward pressure on rental rates. It is forecasted that 2010 should see a return in speculative development albeit with tighter capital and at a more cautious rate. Once borrowing and employment growth resumes, the office market will be on its way to recovery.
The area’s industrial market has been a bright spot in the Midwest; it has outperformed early predictions of decreased absorption. The year-to-date positive net absorption is 2.4 million square feet. The increase is due to the 2.7 million square feet of build-to-suit projects that were planned prior to 2009 and came online in the third quarter. Although the Indianapolis industrial market has remained strong within its own boundaries, it is beginning to be affected by the oversupply of inventory in neighboring markets inside and outside of Indiana. Valuation continues to be a challenge for the local market, as the decrease in overall sales allows for less equal comparison of properties. In 2010, construction, especially speculative, will remain steady but slow with a few built-to-suits slated for completion.
Kansas City
Although Kansas City closed out the third quarter of 2009 with 4,000 square feet of positive net absorption, the area’s year-to-date office market absorption is a negative 310,000 square feet. Additionally, vacancy rates climbed to 18.9 percent for Class A and B properties, with approximately 180,000 square feet of new construction. With local companies continuing to downsize and relocate, Kansas City’s office vacancy rate is forecasted to continue to increase through the first half of 2010. The market’s recovery is expected to be gradual, as companies will backfill shadow space long before the need for larger space arises. With construction of traditional office projects halted, the development of medical office and healthcare space continues to take on a leading role in the market.
The area’s lack of excess distribution space combined with the area’s economic fundamentals has Kansas City’s industrial market poised for a possible early rebound. The market experienced an increase in gross absorption of 2 million square feet in the third quarter that, if it continues, will boost the area’s overall economy. The 188 million-square-foot office market had a negative absorption of 733,000 square feet during the third quarter and 2.8 million square feet year-to-date. Approximately 432,000 square feet of new construction was completed during the third quarter, and a 1.1 million-square-foot distribution center is slated to come online by the end of the year.
St. Louis
St. Louis’ office market, which has experienced smooth sailing through most of the recession, was finally trumped by the downturn. The third quarter of 2009 saw the market’s first negative absorption. This change was foreshadowed by downward-moving employment trends in the area, which lost 6,200 jobs within the first 8 months of the year. St. Louis has pockets of light scattered throughout the market, with the majority of positive absorption fueled by health-related businesses. Recent projects include BJC’s 84,000-square-foot expansion in the Meridian at Brentwood in the Clayton market and more than 200,000 square feet of new development by Express Scripts and Essence Health Care in North St. Louis County. Scheduled 2010 projects include the 447,000-square-foot Centene Plaza in Clayton, which is 75 percent pre-leased to Centene and Armstrong Teasdale. Other office-related activity is attributed to pharmaceuticals and life sciences, which are currently adding approximately 170,000 square feet to the market.
The St. Louis industrial market was hit hard in mid-2009 with the closing of the Chrysler facility and, subsequently, the closing of Chrysler’s direct suppliers. These departures left more than 7.3 million square feet of vacant property in the market. While some of the space — approximately 40 percent of the 2.2 million square feet vacated by suppliers — has be re-absorbed, the impact of the closings is still being felt throughout the area. The market’s overall absorption was positive 340,000 square feet for the first half of 2009 and would have likely remained positive if not for the closing of Chrysler. Construction continues to remain steady, with approximately 795,000 square feet added year-to-date. Industrial leasing activity has also remained strong and is a driving force in keeping absorption levels in the black.
Source: Colliers Turley Martin Tucker Third Quarter Market Report, 2009.
Chicago Commercial Real Estate Positioned for Long-Term Growth
Despite loan maturities and other challenges in the capital markets, demand drivers should being to emerge in 2010 and 2011.
The economy showed signs of improvement in late 2009, as GDP growth beat expectations and signaled the end to the technical recession. Accelerating exports and stabilized consumer spending fueled growth in the third quarter. The dollar’s weakness against foreign currencies coupled with a recovery of global demand, should support further export gains. Government programs and tax incentives, such as the first-time homebuyer credit, drove the rise in spending in the third quarter. As the impact of government action abates; however, traditional demand drivers such as job growth and improved consumer sentiment will be needed to sustain an economic recovery. Local companies should resume hiring in 2010, albeit at a modest rate, starting well into the year. When hiring gains momentum in late 2010 and 2011, demand for office space, apartment units and retail properties will begin to increase.
Rising activity from private investors, many of whom feel that valuations are at or nearing a bottom, supports a positive long-term outlook for the Chicago investment market. Buyers are targeting stabilized assets with only moderate lease-up risk. While properties with stable tenancies have accounted for the majority of recent sales, value-add opportunities exist for cash-equipped buyers with greater risk tolerance, particularly in the southern and southwestern portions of the suburbs.
In 2010, real estate investors will continue to find some opportunities to acquire distressed commercial real estate; however, this trend is expected to fall short of buyers’ expectations. In 2008 and 2009, delinquencies across all property types steadily increased. Despite this rise, the complexity of the CMBS market and commercial banks’ need to avoid further losses will continue to limit foreclosures and distressed asset sales.
— John Przybyla is the vice president and regional manager of the Chicago Downtown office of Marcus & Millichap Real Estate Investment Services. |
The Plaza at the Speedway
850,000-Square-Foot Power Shopping Center
Block & Company, Inc., Realtors is one of the Midwest’s premier full service real estate organizations. Founded in1946, Block & Company and its team of experienced professionals from their headquarters in Kansas City set the standard for complete commercial real estate services with market knowledge, creativity, experience, and insight unparalleled in the industry. With transactions extending to 187 cities in 36 states, Block & Company manages over 6 million square feet of retail, restaurant, office, hospitality, and industrial space.
Block & Company’s key areas of service include full service brokerage, sales and leasing, commercial property development, asset management, tenant and owner representation, investment services, hospitality consulting, construction management services, and analysis and disposition of REO properties.
The Plaza at the Speedway is a new 850,000 square foot retail power shopping center at I-435 & Parallel Parkway in Kansas City, Kansas. Block & Company, Inc. Realtors joined forces with Classic Real Estate to develop the Plaza at the Speedway, which broke ground in April 2008.
The Plaza at the Speedway development is located in the epicenter of a major tourism district surrounded by numerous attractions such as the NASCAR Kansas Speedway, Kansas City T-Bones Baseball Park, Cabela’s, Nebraska Furniture Mart, The Legends Lifestyle Shopping Center, The Great Wolf Lodge, and Schlitterbahn Vacation Village. The multi-state pull of these dynamic retail and entertainment concepts attracts more than 14 million visitors annually from as far as 250 miles away.
Not surprisingly, big name retailers are lining up to open new stores at the Plaza at the Speedway. The center is anchored by a 184,000 square foot “environmentally green” Walmart Supercenter, which opened last month. Walmart will co-anchor the center along with the recently opened 45,000 square foot Best Buy, and Kohl’s, which is scheduled to open late 2010. Other tenants include Red Lobster, Taco Bell, Olive Garden, Chick-fil-A, Mattress Firm, Jimmy Johns, Wendy’s, and Sport Clips.
Phase I of the development is complete and Phase II is currently under construction. When finished, the Plaza at the Speedway will offer a wide range of retail and dining options designed to meet the everyday needs of the local community and also draw great numbers of visitors from throughout the region.
Anchor, junior anchors, pad sites, and small shop space is available for lease. Block & Company, Inc., Realtors is the leasing/development agent and construction manager for the center.
“I am proud that Block & Company is a part of this new construction project that benefits Wyandotte County and of the new jobs that have been and will continue to be created because of the Plaza at the Speedway development,” said David M. Block, President, Block & Company, Inc., Realtors. |
Marshfield Plaza
454,000-Square-Foot Urban Retail Redevelopment
Urban renewal has never been so useful – just ask any of the thousands of shoppers finding convenient, family-oriented retail at the still-growing Marshfield Plaza on Chicago’s South Side. Now opening in phases at 119th Street and Marshfield Avenue, Primestor Development’s Marshfield Plaza features 454,000 square feet of the country’s best retailers where they are most needed.
Already open are Jewel-Osco, Anna’s Linens, Target, Marshalls, Staples, Petco, Dollar Tree, Chili’s, Panda Express, and Payless ShoeSource, with L.A. Fitness, Radio Shack, Fifth Third Bank opening soon. This one-stop shopping experience is also rapidly becoming something more. Special events such as car shows, community meetings and simple family get-togethers occur regularly, making Marshfield Plaza more than a project, but the heart of the community.
Perhaps as important, Marshfield Plaza also is a prime example of redeveloping a blighted property to reinvigorate a community. The center replaces a 600,000-square-foot former Libby Food canning plant that had been empty for years. The conversion continues the renewal of the neighborhood’s retail base and the expansive redevelopment efforts of Chicago’s 34th Ward. Since acquiring the property in 2005, Primestor has worked with its partner, Prudential, and the city to redevelop the project, its first in Chicago.
The renewal is architectural, as well. An industrial facility has been replaced by new construction with strong, clean design, significant convenient parking, tree-lined pedestrian paths and benches that encourage shoppers to linger. The result: A once-dead plot of land that detracted from its area is now a prime attraction, drawing visitors from other neighborhoods and contributing to the economic vitality of the South Side. Marshfield Plaza’s location just off Interstate 57 boasts exceptional visibility, with 120,000 cars per day, and the center’s trade area population of approximately 185,000 people within a three-mile radius has an average household income of nearly $58,000.
Sustainability also is a key hallmark of the project, the largest new shopping center in Chicago’s South Side. Designed to LEED standards, the open-air center utilizes the best practices for sustainable development, such as high amount of recycled content, diverted waste, Green roofs and heat island mitigation measures. Anchor Jewel-Osco has opened its “green” format store here, meaning Marshfield Plaza will be as good for the environment as it is supportive of the local economy.
Marshfield Plaza is the latest success for its developer, Beverly Hills, CA-based Primestor Development, which is dedicated to bringing quality retailers to underserved ethnic markets, first in its native Southern California, Nevada, and now to Chicago’s South Side. By combining quality architecture, the best national, regional and local tenants, on-site amenities including seating areas and shade, and a real connection to its communities, Primestor has literally helped remake its markets. As Marshfield Plaza continues to grow, and Primestor extends that mission nationwide, a new era of urban retail rebirth is beginning. |
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