Industrial

Chicago’s suburban industrial market has managed to maintain a significant level of activity compared to other major industrial cities nationwide although it is substantially slower than in previous years. Due in part to its diverse business mix, strategic centralized location and immediate access to multiple modes of transportation, Chicago has long been a stabilizing force that calms the volatility within the industrial real estate business.

The Interstate 55 corridor submarket continues to pull most of the weight in the suburban industrial market. A large number of buildings have been absorbed in the past few months, which has spawned a new wave of speculative development. This absorption indicated a sustaining confidence in a market characterized by the continued emergence of logistics firms and the increasing willingness of manufacturers to outsource their warehousing and distribution operations.

Other submarkets such as Central DuPage and Interstate 88 are not faring as well during the economic downturn. Build-to-suit for lease and for sale activity in these two submarkets is down compared to activity in previous years and to activity in other submarkets. However, there has been some recent significant leasing of existing space in the Central DuPage market to tenants such as General Electric, Lava Lamps, Rogers Manufacturing, FIC America and DuPage Machine Products. Three large facilities in Aurora are fielding lease proposals; but so far, have not reduced their backlog of available space. The pricing-and-repricing phenomenon during the past 15 months indicates companies’ general reluctance to pull the decision trigger. On deals that are closing, the spread between the asking rate and the accepted rate is wider than it was 2 years ago even though owners have not lowered their asking rates appreciably.

During 2002, corporate spending freezes and budget belt-tightening resulted in a pent-up demand for industrial space. Many corporate executives are only now beginning to reallocate capital into their real estate budgets. Relocation and reorganization are the decision drivers that continue to define space requirements. As companies consolidate multiple locations and uses into larger buildings, office build-out is becoming more commonplace in industrial buildings. Also more commonplace is the hiring of logistical consultants, who analyze a corporation’s distribution network, propose plans to optimize service efficiency and decrease operational costs.

Investment sales are one of the most active segments of Chicago’s suburban industrial market. With the disappointing results of alternate investment vehicles, many investors are turning to real estate for respectable yields. Institutional investors prefer new assets with investment-grade tenants on long-term leases. Because of minimal new construction and the reluctance of building owners to sell property with investment-grade tenants, a high volume of money is chasing a shortage of product, putting downward pressure on cap rates. There is definitely a demand for investment sales, but closings can be elusive.

To take advantage of more favorable rates, economic development incentives and less expensive land, some companies have relocated to the outskirts of Chicago’s suburban market. Labor is the site selection watchword of the industrial market as chief financial officers pay closer attention to total gross operational costs, labor supply and access to transportation.

As a result, submarkets such as University Park and northwest Indiana, labeled emerging markets 12 months ago, are morphing into mainstream options because of the depth of their available labor markets. For example, Holladay Properties — developer of Ameriplex at the Port in Portage, Indiana — is banking on the area’s established labor pool to act as a catalyst for leasing its 517,000-square-foot speculative facility, currently under construction.
Chicago’s suburban industrial market may be down compared to recent years, but it is far from out.

- Benjamin Cremer is a senior associate in the Industrial Brokerage Group of Chicago-based NAI Hiffman.

Multifamily

The apartment investment market in Chicago and its suburbs has continued to see strong interest from national, regional and local investors. This interest has remained strong even as the local economy has slowed and net operating income levels have decreased due to lower revenues (resulting from higher vacancy levels) and higher expenses (such as insurance costs).

Demand has been driven by a lack of attractive investment options, the long-term viability and stability of the market and low interest rates. With stocks continuing to post lackluster results, seemingly daily news of corporate scandals and bonds offering very low yields, many public and private investors have continued to be rewarded with solid returns on investment and preservation of investment capital.

Low interest rates have proven to be a double-edged sword for multifamily owners, particularly owners of higher-end product. On one hand, their own debt-service costs have been reduced. On the other hand, some of their renters have chosen to take advantage of low interest rates and have purchased single-family homes or condominiums. In spite of the low interest rates, increasing median home values and the large number of “renter-by-choice” tenants have kept many renters in the marketplace.

While there has been some trickle down effect from the factors mentioned earlier, owners of non-high-end units have fared much better in the slow economy, with many seeing stable rents and occupancy levels remaining above 95 percent. However, some suburban Chicago submarkets, particularly those with larger, high-end units, have experienced occupancy levels have been as low as 85 percent to 90 percent.

On a macro level, investment standpoint, both the suburban and city apartment markets in the Chicago area remain healthy. Capitalization rates are low and the average price per unit continues to increase, although factors such as building quality, the local employment base and specific location cause huge variation between properties. The average price per unit in the Chicago area has increased from approximately $32,750 in 1996 to an estimated $53,000 in 2002, while capitalization rates during 2001 for well-performing and well-located assets typically ranged between 7.25 percent and 8.25 percent.

- Greg Moyer is a managing director of Marcus & Millichap and regional manager in the firm's Chicago office. Alon Yonatan and Yitzie Sommer, research services managers in the firm's Chicago office, also contributed to this article.

Retail

Now more than ever, retail development in suburban Chicago is being driven by a handful of big box players. The main drivers for larger centers (with 300,000 square feet or more) include the home improvement giants The Home Depot, Lowe’s Home Improvement Centers and Menards; discount retailers Target, Kohl’s and Wal-Mart; and the warehouse club Costco. Borders Books & Music, Barnes & Noble and Michaels are following close behind.

Grocery continues to be a major expansion category, with Jewel/Osco leading the pack. Small food operators and casual dining establishments of 3,000 square feet and below are still actively expanding. The main competitors in this category include Corner Bakery, Chipotle, Panera Bread, Baja Fresh, Noodles & Company and Quizno’s.

Competition is also fierce for cell phone operators and bedding stores, which are heavily vying for end cap positions. Currently at a premium, those positions can command the same rent regardless of demographics.

Additionally, the banking industry has burst wide open across the demographic spectrum. This category is so competitive, in fact, that banks are paying developers higher than asking prices.

During the past year, some significant new retailers have also joined the suburban Chicago scene. For example, Galyan’s Trading Company, Lowe’s Home Improvement Centers, Woodman’s and Kroger have each added several stores in the market. Notable new restaurants entering the market include Biaggi’s, Claddagh Irish Pub, Red Star Tavern, Cameron Mitchell Restaurants and Bravo.

The heaviest retail development has occurred along the Randall Road corridor, from Crystal Lake to Aurora. Several new developments have sprouted up on large tracts of available land in this high growth area, which was previously underserved by retail. The most significant new developments are the lifestyle centers, Geneva Commons, developed by Jeffrey Anderson of Cincinnati, and The Glen Town Center, developed by OliverMcMillan of San Diego.

Geneva Commons, which is anchored by Galyan’s Trading Company and Barnes & Noble, opened in September at the intersection of Randall and Bricher Roads in Geneva. The 420,054-square-foot center is pulling shoppers from 10 miles in either direction — about twice the area of a regional mall — but without a typical mall anchor like Carson’s or Marshall Field’s.

Charlestowne Centre Mall in neighboring St. Charles will unfortunately feel the biggest impact from this new development. However, Geneva Commons will also spur the development of additional lifestyle centers. The development company is already proposing another lifestyle center, Algonquin Commons, to be built 12 miles north of Geneva Commons along the Randall Road corridor.

The Glen Town Center in Glenview is currently under construction and scheduled to open in October. Developer OliverMcMillan is transforming a 1,200-acre former naval air base into a town within a town, with a 470,000-square-foot retail center as its centerpiece. Mid-America is handling the leasing for the project, which is midway between two regional malls, Old Orchard and Northbrook Court.

Tenants that have pre-leased space at The Glen Town Center include anchors Von Maur’s and Galyan’s, Crown Theaters and Market Foods. The project also includes two golf courses, 2,000 single and multi-family residential units, a 150-acre park, assisted living facilities, and 1 million square feet of office space.

With strong development continuing along the Randall Road corridor, the markets to keep an eye on in the near future are the burgeoning towns of Algonquin in the north, Huntley in the far northwest, and the south Chicago suburbs of Homer Glen, Plainfield, Frankfort and Mokena.

- Steve Frishman is a principal of Mid-America Real Estate Corporation, a ChainLinks company, located in Oakbrook Terrace, Illinois.

Office

The economic slowdown has forced many companies to scale back operations in both the suburban and city markets in the Chicago area. Layoff announcements by major employers such as Anderson, Motorola, Lucent Technologies, United Airlines and American Airlines have led to higher vacancy levels. This vacancy increase has been more dramatic in the suburbs than in the city, since many of the major employers hardest hit had leased space in the suburbs. Additionally, an abundant amount of new construction space has come online in the suburbs, but anticipated tenants have failed to materialize.

This lack of tenant demand and the general softness in the marketplace have many lenders tightening their underwriting requirements for new construction projects in both the city and the suburbs. Although historically low interest rates are helping deals that might otherwise be denied, more lenders are looking for larger equity requirements, longer lease terms and increased tenant quality to secure financing.

With the exception of projects already in the pipeline, no new project announcements are expected until the market recovers. Despite some negative indicators, buyer interest in suburban and city office properties remains strong. With the stock market down, a lack of alternative investment options and belief in the long-term viability of the marketplace, many institutional investors, syndicators and private investors are paying relatively low capitalization rates for office properties.

Investors that have tended to invest in other product types, such as apartments, are beginning to shop for office properties with a small number of stable tenants on long-term leases. They are looking for less management-intensive properties that offer higher cash returns.

Unlike many other major office markets across the country, Chicago possesses a diverse employment base with little reliance on any one sector. Many of these investors look to Chicago as a market that will improve as the national economy gains momentum.

- Greg Moyer is a managing director of Marcus & Millichap and regional manager in the firm's Chicago office. Alon Yonatan and Yitzie Sommer, research services managers in the firm's Chicago office, also contributed to this article.

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