CITY HIGHLIGHT, FEBRUARY 2011

SUBURBAN CHICAGO CITY HIGHLIGHTS
Michael Havdala, Jeff Brant, Steven Weinstock

Suburban Chicago Retail Market

Havdala

One of the most significant trends in Chicago’s suburban retail real estate market has been the rise of local and regional entrepreneurs — and the decline of some prominent national restaurant chains. Today, local and regional chain restaurants are starting to occupy attractive, high-profile retail spaces that once were financially out of reach.

During the past decade, many national restaurants stretched themselves too thin in the quest to expand their empires. Eventually, a combination of bad fundamentals, the inability to secure financing and a decline in sales forced several of these well-known brands into misfortune, requiring considerable liquidation of their assets. With diminished confidence among national restaurant brands, a once bottomless pool of real estate buyers quickly dried up. However, as prices in suburban Chicago continued to fall, an unlikely group began to reassume control — local restaurateurs.

One of the most notable restaurant bankruptcies of the past decade was that of the archetypal Bennigan’s chain. Today, the chain’s exurban former corporate locations are ideal for certain local operators seeking high-visibility, low-cost buildings. Beelow’s Steakhouse recently opened its first and only location in an old Bennigan’s building located on an outlot for the Regal Cinemas in Lake Zurich. Similarly, Cattleman’s Steakhouse opened a flagship restaurant in the former Bennigan’s in Bolingbrook, next door to national household names like T.G.I. Friday’s and Red Lobster.

For many of these local businesses, a location in the company of national retailers along major arterials is a dream that would be otherwise unattainable were it not for depressed property values. When the local breakfast café Burnt Toast opened a location in a former Ruby Tuesday’s location in Algonquin, for example, it was sharing the highly visible Meijer outlots with Chipotle and Panda Express.

Enterprising regional operators have found themselves in a position of considerable strength despite the lackluster market. Portillo’s Restaurants, a name synonymous with Chicago-style hot dogs, acquired a former Bennigan’s in Batavia and a former Bakers Square in Downers Grove and converted them for use by its breakfast concept, Honey-Jam Café. Jameson’s Charhouse opened its fourth and fifth locations in a former Bennigan’s in Crystal Lake and a former Boston Blackie’s in Skokie, respectively. The repurposing of these facilities surely helps to minimize the time necessary to expand or launch a new concept and affords local owners the time to focus on operations and marketing.

Whether or not the locals can succeed where the nationals failed is a question that cannot yet be answered. As a new breed of nationals inevitably re-enter these markets, the neighborhood establishments may find themselves facing considerable competition.

The rise of local and regional restaurants is creating new challenges for retail real estate brokers. The localization of the restaurant real estate market requires a more nuanced understanding of submarket players and dynamics, a greater degree of creativity than in the past when researching buyers for available buildings, and a certain amount of patience when working on transactions with entrepreneurial ventures that may or may not have sophisticated in-house site selection expertise.

During the height of the real estate bubble, a broker’s prospective buyer list for a Chicago retail property would have been strikingly similar to that of any broker across the country. Now, more than ever, local expertise is absolutely essential for exploring an untapped universe of opportunities among local operators that may have otherwise been ignored. For the time being, these locals possess the greatest potential for purchasing and restoring value to the assets in these exurban markets.

— Michael Havdala is senior vice president with HSA Commercial Real Estate’s retail brokerage division in Chicago.

Northwest Indiana All Markets

Brant

Sometimes overlooked as a suburb of Chicago is Northwest Indiana. Within 30 minutes of downtown Chicago and offering many of the amenities of traditional Chicago suburbans, Northwest Indiana cities and towns are prime for development and expansion in the Chicagoland area.

Although development has slowed, Northwest Indiana is experiencing leasing and sales transactions, especially with user acquisitions.

"There's not much speculative transactions going on — there's just leasing and users buying buildings," says Jeff Brant, vice president of Schererville, Indiana-based Brant Construction. "The reason is that a company can probably buy an existing building more competitively than building one from the ground up."

A few projects are going up in the area. BP/Amoco is remodeling its property in Whiting, Indiana. Additionally, Valparaiso, Indiana, will see an expansion of Porter Memorial Hospital. This approximately $220 million project will spur related medical development along State Road 49 in Valparaiso.

The Northwest Indiana market does not have an excess of vacant inventory on the market. Currently, the Class A office vacancy is approximately 19 percent and industrial space is approximately 10 percent vacant. Along the 65 and 30 interstates, there's approximately 6 million square feet of retail space with approximately 93 percent occupancy, notes Brant. Similar to smaller cities throughout the country, the smaller markets in the Northwest Indiana market have a slight increase in vacancy rates, with Schererville at approximately 11 percent.

Northwest Indiana is experiencing, and will continue to see, an uptick in interest from companies and individuals across the Midwest, especially from Illinois, which recently changed its tax climate. Brant explains that Illinois has nearly doubled its state corporate taxes and personal income taxes. This change in tax climate will keep Northwest Indiana on the radar of companies and individuals looking for tax relief in the greater Chicago area.

For future development, Brant suggests watching the 49 Corridor due to the new hospital development, which should bring in future medical-related real estate. Additionally, the I-65/I-30 Corridor has shovel-ready real estate, which is zoned for office, retail and industrial uses, ready for development.

"We think that our market is going to really pick up with the change in the tax climate in Illinois," says Brant. "Lake County, Indiana, borders Cook County, Illinois, so it's really not a big move for people to cross the border. You're only 30 minutes from downtown Chicago."

— Amy Bigley

Suburban Chicago Multifamily Market

Weinstock

The United States apartment sector staged a strong recovery in 2010 well ahead of expectations, despite modest job creation and stubbornly high unemployment. Net absorption surged, with occupied stock rising by nearly 200,000 units, double the number of apartments constructed and the highest level on record since 2000. Several factors contributed to high levels of absorption, including the release of pent-up renter demand as households de-bundled in the wake of the recession. In addition, apartments benefited from private-sector job growth in the critical 20- to 34-year-old cohort, expiration of the homebuyer tax credit, displaced foreclosed homeowners entering the renter pool, immigration and lower unit turnover. Renting also became a lifestyle and economic choice for many households as the effects of the housing collapse and recession persisted. Continued recovery in 2011 depends more heavily on improvements in the job market, which should gain momentum as the year progresses.

Building on that momentum, operating conditions in the suburban Chicago apartment market will strengthen considerably this year, building on improvements in vacancy and rents recorded in 2010. Apartment construction will sink to one of the lowest levels in the past decade, minimizing competition for tenants at a time when renewed job growth will accelerate the formation of rental households. A 2 percent increase in financial services and professional and business services employment will spur demand for apartments throughout the Chicago area, especially in higher-priced, inner-ring suburbs, such as Evanston and Oak Park, and in-city submarkets like the Gold Coast. As vacancy falls closer to the 5 percent threshold in 2011, rent growth and a more rapid burn-off of concessions will commence in the second half.

The performance of properties in inner-ring suburbs also will strengthen this year, as apartments in these areas draw both residents from outlying sections of the metro who desire housing closer to workplaces and those renters shut out of tighter in-city submarkets. Driven by low interest rates and the expanded availability of acquisition financing, the investment market will gain momentum in 2011. Buyers will bid aggressively on high-quality properties in the city and first-ring suburbs, encouraging an increasing number of owners to list assets. Cap rates fell across the market in 2010 but will likely remain near their current ranges through this year. High-quality assets in city locations often command first-year returns of less than 6 percent, while noncore city assets and properties in the suburbs primarily trade from 6.5 to 8.0 percent based upon current operations. Distressed listings received considerable attention in 2010, but deals involving these assets will diminish as the year progresses and owners facing difficulties begin to restore property operations.

Employment Forecast: Expansion of the trade and professional and business services sectors will contribute significantly to the creation of 52,500 jobs this year, a 1.3 percent increase in total employment. Approximately 20,000 positions were eliminated in 2010.

Construction Forecast: Only 700 new rentals will come online in 2011, down considerably from the completion of 2,420 units last year.

Vacancy Forecast: The metrowide vacancy rate will decrease 60 basis points this year to 5.5 percent on resurgent demand and minimal construction; vacancy also fell 60 basis points in 2010.

Rent Forecast: Asking rents will rise 2.3 percent to $1,070 per month in 2011, following a 1.3 percent increase last year. Concessions will decline to 6.1 percent of asking rents as effective rents climb 3.2 percent to $1,005 per month; in 2010, effective rents advanced 2.4 percent.

Investment Forecast: Investors seeking distressed assets will continue to find opportunities on the southern and western sides of the city. Prospective buyers will require a long-term outlook for rehabilitating properties, restoring stable operations and implementing rent increases.

— Steven Weinstock is the regional manager of the Oak Brook, Illinois, office of Marcus & Millichap Real Estate.


©2011 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.




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