Multifamily buildings are maintaining strong appreciation in Chicago. This factor, combined with the large number of condominium conversions, is helping to drive sales in the area. However, many renters have opted for homeownership due to the low interest rates available for single-family homes. In turn, owners have had to address higher vacancy rates. Rental demand is higher in low-income neighborhoods and, therefore, more profitable to apartment owners, while owners of multifamily buildings in high-income areas are feeling the bite of increasing tax assessments.

The retail market has been doing well with expansions and new construction underway throughout the metropolitan area. New housing starts that are planned in some of the outlying suburbs should draw additional retail development for the next 3 to 5 years.

The office market is suffering from a glut of vacant space, and more space is expected to come online during the first and second quarters of this year. Tenants will continue to reap the benefits of concessions and low rental rates.

During last year, the Interstate 55 and Interstate 80 corridors performed the best — in terms of industrial activity — due to the amount of vacant land and the ability to borrow inexpensively. These two corridors are expected to continue to prosper this year, with the added bonus of increased deal completions compared to last year.

Multifamily

In the Chicago multifamily market, buildings are maintaining strong appreciation and developers are buying apartment buildings and converting them to condominiums. These two trends are driving sales in the market. But lower interest rates have hurt the rental market, forcing buyers to address higher vacancy rates that impact profitability. Also, rising property taxes are driving owners to sell their properties while prices are still relatively high.

The Chicago Rehab Network reports that 56 percent of Chicago households rent. Strongest rental areas are close to downtown and the lakefront. Affordable housing, which is needed in Chicago, is located in neighborhoods south of the Loop and in the southern and western suburbs. Rental rates for one-bedroom apartments range from $650 to $1,800, but this amount varies greatly between neighborhoods. Lakefront and South Loop apartments generally command the highest rents.

Lower interest rates have inspired many young residents to buy rather than rent in Chicago, especially on the north side of the city. Although the presence of young homeowners is expected to accelerate in the coming decade, the distribution of owned versus rented properties will continue to divide along economic lines.

Lower interest rates and higher tax assessments on apartment buildings in Chicago have affected the rental housing market in a few ways. First, rental demand is better and more profitable in low-income neighborhoods. In the higher income neighborhoods, owners of multifamily apartment buildings are feeling the bite of 30 percent to 60 percent increases in tax assessments. Owners with high vacancy rates (the average is 7 percent) may opt to sell their buildings, rather than struggle with the increased expenses of maintenance, taxes and fuel costs.

In addition, selling apartment buildings to developers for condominium conversions inflates the assessment prices. Apartment building owners in Chicago look for capitalization rates between 7 percent and 12 percent. On the north side of Chicago, a well-run building will see a capitalization rate of 7 percent, while on the south side 12 percent is good. Landlords have to deal with all of the issues and expenses of running a building for much lower profitability if they buy the building for the same price as the condominium converters. Condominium converters usually try to make a 10 percent to 15 percent profit on projects, and they can pay a premium and still hit these marks without the expense of maintaining an apartment building. Independent groups, such as The Broz Group, Mak Browne and Cyrus Development, are undertaking many of the condominium conversions in the city. The payoff for landlords is in appreciation of the building.

— Jeanne Cuff is a realtor associate for Chicago-based The Broz Group.

Retail

Despite a depressed economy, the suburban Chicago retail market is doing well with expansions on the west, north and south sides of the metropolitan area. New shopping centers are under construction in Mokena, New Lenox, Frankfort, Shorewood, and Plainfield in the southwest; in South Elgin, Lake in the Hills, and Algonquin in the northwest; and in Vernon Hills, Glenview, Gurnee and Waukegan in the north. New center construction has followed the development of large housing tracts in these areas.

Retailers leading the new construction include Kohl’s, Wal-Mart, Lowe’s Home Improvement Warehouse, The Home Depot, Costco, Menard’s and, most significantly, Target. The Ryan Companies is planning to build new SuperTarget stores in Shorewood, South Elgin, Mundelein and New Lenox. Retailers such as Petco, Sport Mart, Borders Books & Music, Barnes & Noble, Office Depot, Michaels, Famous Footwear, and a host of food tenants, including Panera Bread, Pot Belly, Quizno’s and Subway, are showing voracious appetites for space.

Lifestyle centers have also made their marks on the suburban landscape. Poag & McEwen and Developers Diversified Realty began this development with the opening of the Deer Park Town Center in October 2000, anchored by Barnes & Noble, Circuit City and many of the nation’s major specialty retailers, several large restaurants and Century Theaters. OliverMcMillan followed with the grand opening of The Glen last October on the redeveloped Naval Air Station in Glenview. The center is anchored by the second Von Maur Department Store in the region and by Galyan’s Trading Company.

Galyan’s also anchors Geneva Commons, opened by Cincinnati-based Jeffrey R. Anderson Real Estate last September. Ann Taylor, Pottery Barn, Coldwater Creek, Chico’s, Banana Republic, Williams Sonoma and Crate & Barrel are tenants in this center, as well as in Algonquin Commons, which is now under construction in Lake in the Hills in McHenry County. This area is also experiencing tremendous retail and residential growth.

While most big box retailers self-develop in the outer suburban regions, the suburban downtowns have also experienced significant change. Tucker Development and Joseph Freed are co-developing Metropolitan Place in downtown Des Plaines. The Taxman Corporation is developing the intersection of Routes 21 and 45 that will create a downtown area in Vernon Hills, and it is developing downtown projects in Oak Park and Forest Park. Arthur Hill developed Church Street Plaza, which is anchored by The Century Theatre and Borders Books & Music. The project transformed downtown Evanston into a metropolitan retail area. Klutznick and Focus Developments co-developed Sherman Plaza, which will also anchor downtown Evanston.

Developers are building convenience centers that are close to 20,000 square feet. Companies such as National Shopping Plazas, V-Land Corporation and James Kaplan specialize in these developments. Rental rates range from $25 to $35 per square foot, triple net. Developers are paying top dollar for Class A sites, which is reflected in the rents.

Family Dollar Stores, Dollar General and Dollar Tree Stores are beginning to make strong inroads in both the city and the suburbs. They pay significantly lower rents, however, and fill a niche in taking second generation space.

Chicago suburban vacancies have remained relatively low, between 8 percent and 10 percent. With Kimco and The Home Depot absorbing former Kmart spaces, most vacancies in the market are 15,000 square feet or less.

The future looks bright, as expansion continues further from the metropolitan area into the suburbs. Some of these areas are still cornfields, but with new housing starts planned, retail development should remain strong for the next 3 to 5 years.

— Stuart Lenhoff and Barry Millman are principals of Arlington Heights, Illinois-based Horizon Realty Services.

Office

As landlords continue to look for any sign of a recovery in the office market, tenants are continuing to talk to local real estate advisors with hopes of reducing their overall real estate costs. While subtle hints of a turnaround in leasing activity are trickling out, the abundance of office space on the market will continue to cause headaches for building owners.

Office vacancy rates in the outlying suburban Chicago office markets remained stable at 19 percent during both the second and third quarters of 2003. Conversely, the national average has jumped from 16.7 percent to 18 percent during the same time period. As local organizations — Lucent Technologies, the city of Chicago, Motorola and Sears — continue to layoff employees, the sublease space predicted to flood the market in the first and second quarters of this year may add 1.5 percent to 3 percent to the local office vacancy statistics.

While leasing activity has remained relatively stable, large corporate headquarters and regional office projects are adding momentum to the market.

An example of this momentum is apparent in several northern Chicago suburbs. In a 6-month period beginning last May, Equity Office Properties Trust’s Tri-State International office complex negotiated more than 180,000 square feet of new office leases and an additional 80,000 square feet of lease renewals. Now, high-profile suburban tenants Open Text, Orren Pickell Designers and Builders, and The Association of Legal Administrators have new homes within the complex.

As the real estate community continues to monitor per-square-foot rental rates as a function of vacancy statistics, it is safe to predict that, on a macroeconomic level, tenants in the entire suburban Chicago office market will see better days in the coming year. More sublease space will hit the market causing landlords to compete with phantom space. Demand for expansion space will be few and far between throughout the year as layoffs persist. Overall, as suburban Chicago office rental rates hover at more than $22.25 per square foot (full-service), tenants will observe that landlords are willing to continue anteing up creative concession packages in order to maintain their current rates. With the added leverage gained by the typical tenant, this year will prove to be promising, making it another good year for tenants.

— Kevin McLennan and Tyler Roth are vice presidents at Chicago-based Steinco.

Industrial

Although the market did not fully recover in 2003, an increase in activity was evident. Chicago is a diverse economy with many different industrial submarkets, and each segment presents varied circumstances. For instance, the I-55 corridor remained one of the most active submarkets within the Chicago metropolitan area, while the southern suburbs continued to experience record vacancy rates. Many factors contribute to the varied activity levels including types and quality of available space, strength of end-users’ industries, and proximity to labor and transportation. It is this variety that makes Chicago such an interesting and vibrant real estate market.

The majority of the development in 2003 was seen in the southern portion of the I-55 corridor and in the I-80 corridor. One of the more notable projects in the I-55 market is the redevelopment of the Joliet Arsenal into CenterPoint Intermodal Center by CenterPoint Properties Trust. The 2,200-acre mixed-use park is one of the nation’s largest private developments, and it is anchored by a 621-acre Burlington Northern Santa Fe intermodal rail facility. The project consists of up to 15 million square feet of warehouse, distribution and light manufacturing space, which includes 1 million square feet of crossdocks, and nearly 55 acres of ancillary commercial and retail development, including hotels, a truck stop and truck related services. The surplus of vacant land, the ability to borrow inexpensively and the premier location makes this submarket desirable for developers.

While big boxes remained popular in the I-55 corridor, many new business parks were also announced. Two 900,000-square-foot industrial buildings were completed in the Bolingbrook Distribution Center with 750,000 square feet occupied by Exel. An additional 147,000 square feet of space and land for up to an 800,000-square-foot build-to-suit are also available in the park. These recently planned industrial parks will benefit from a location with multiple state access via I-55 and I-80, an abundance of labor and a low tax base. Construction of supplementary parks will also contribute to the I-55 activity making the already crowded field even more competitive. As a result, the coming year will be a great time for tenants seeking industrial space in the I-55 corridor.

The I-55 corridor and the I-80 corridor will continue to generate increasing interest this year. Additionally, the current inventory will continue to be absorbed. Build-to-suits will likely remain the most desirable for a company that has the luxury of waiting 9 months to 12 months for new space. Design-builds are competitive, delivered when needed and designed to suit a company’s exact specifications. However, not everyone has the luxury of time and, for the companies that need space immediately, speculative properties remain beneficial. In fact, several large projects are currently in the planning stages, and the smaller infill projects are gearing up as well.

While the buzz surrounding these two corridors is nearly the same as it was in early 2003, the difference is the likelihood of deal completions this year. Although activity increased throughout 2003, the number of actual deals signed remained low. This year, the I-55 corridor will presumably remain Chicago’s industrial darling, the I-80 corridor will gain further momentum and dealmakers will begin seeing the ink on the dotted line.

— Jeanne Rogers is executive vice president of Des Plaines, Illinois-based Arthur J. Rogers & Co.

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