COVER STORY, JUNE 2009

MIDWEST OFFICE MARKET FORECAST
Area office brokers provide a forecast for a collection of Midwest markets, and two office park developments currently underway in the Heartland prove that the right project can still get off the ground.

Milwaukee

Despite the severe recession and record job loss being reported, Downtown Milwaukee, Class A properties have fared surprisingly well. The current occupancy rate of 88.89 percent is only 3 to 4 percentage points off historical averages.

In the first quarter, there was negative absorption of 15,450 rentable square feet, but there was no significant event or company pullback that caused this reduction of leased space. A portion of the space was previously marketed as sublease, and has now been returned to the direct vacancy market. Large contiguous blocks of space are difficult to find, especially space on upper floors in top-quality buildings. This fact, coupled with a number of large square footage users openly expressing interest in Class A space, has led a number of industry professionals to believe that Milwaukee may see a new tower on its skyline in the not too distant future.

— Kevin Armstrong, senior vice president of the CB Richard Ellis Office Team.

Fabiano Brothers Park
Monitor Township, Michigan

Fabiano Brothers Park - Monitor Township, Michigan

Fabiano Brothers, one of the largest alcohol wholesalers in the state of Michigan, is advancing construction for a new headquarters and distribution warehouse in Monitor Township. When construction is complete, the $16 million facility will total 191,000 square feet. The facility will include a concrete tilt-up warehouse component, as well as an office component that features a lobby with skylights and granite accents, a state-of-the-art boardroom and a hospitality room with an upscale bar.

But Fabiano Brothers is not stopping there. The wholesaler has purchased 71 total acres at the site of its new corporate headquarters and plans to develop the land into a business park it has named Market Place Corporate Center. St. Louis-based HDA Architects was selected to master-plan the project, which was the result of a years-long relationship between the architecture firm and Fabiano Brothers. HDA’s reputation also played a part in it being selected for the project. “We’re industry experts in the beverage distribution business, so we have quite a list of clientele and experience,” says HDA’s president, Jack Holleran.

The Fabiano Brothers facility will occupy 24 acres of the park. The rest of the space is master-planned for another office/distribution facility like the one Fabiano is occupying and a retail strip-center space along the park’s main road frontage. HDA envisions convenience retail tenants occupying this space. Future plans could also include a hotel and restaurant space. Holleran hopes that another owner/user will take the other main building in the park, but the master plan allows for flexibility.

“It’s certainly going to be market-driven, but I am optimistic about the interest in this park right now,” he adds.

This interest is driven by the fact that all of the infrastructure is already in place and the Fabiano Brothers building is well under way. Holleran says that when tenants drive up to look at the site, they are looking at a business park, not just a pile of dirt that will one day be a business park. The master plan will also keep a uniform appearance among future buildings, which ensures that the park will remain aesthetically pleasing as it gets built out. Holleran believes that this will ultimately be the key to the park’s future success.

“I think it will end up being a premier office/business park and will hold up to the test of time with its design and other amenities,” Holleran says.

— Coleman Wood

Chicago
Downtown

Vacancy rates in the downtown office market are on the rise again after bottoming out below 12 percent in early 2008. As of the end of the first quarter, the overall CBD vacancy rate was 13.8 percent. The “real” economy has finally started to impact the office market, as there has been negative absorption each of the last two quarters. In the first quarter alone, there was more than 822,000 square feet of negative absorption, which impacted all of the major submarkets except for the River North. As the current economic situation continues to unfold, expect vacancy to climb throughout 2009 and into 2010. We expect asking rents will decline and free rent will increase as owners try to balance reduced tenant demand and their own restrictions on capital spending for tenant improvements. Although the market has a long way to go to reach levels seen after the dot-com collapse earlier this decade, when sublease rates reached almost 4 percent of inventory, we believe the increase in direct and sublease listings will be notable as tenants retrench.

Suburban Chicago

Suburban vacancy rates have been increasing since 2007 and ended first quarter 2009 at 21.5 percent, the highest it has been since the first quarter of 2005. Absorption totaled negative 1.2 million square feet, with all of the suburban submarkets posting negative absorption except for the Interstate 55 Corridor.  Sublease and direct listings have increased during the past several quarters, driven by weakening economic indicators. New construction throughout the Chicago metro area remains limited, with few projects breaking ground and even fewer in the planning stages. Throughout the rest of 2009, expect many of the ongoing trends to continue, including rising vacancy, negative absorption, increased available sublease space, limited construction and a frozen capital market.

— Michael Flynn is a suburban office specialist and is the managing director for NAI Hiffman’s Office Services Group. Brian Atkinson, also with NAI Hiffman’s Office Services Group, focuses on the downtown office market.

Indianapolis

Right now, the issue is all about capital, including access to capital for tenant improvements to buildings that exist, as well as access to capital for build-to-suit buildings for companies that want to expand. That’s one side of the challenge, and it has created a difficult market.

On the other side is the financial moves companies are making to protect their long-term viability. The one thing that’s clear about office buildings and office product is that it takes employees. You can have big box warehouses but not a lot of employees in them — maybe a lot of product but not a lot of people working. But in office buildings, you have to have people working in them. So as the unemployment rate continues to climb in most markets across the country — and certainly here in the Midwest, which is a manufacturing-based economy — it’s having an impact on the office market.

The good news is that Indianapolis, in general, is a lot more diverse as a metro area than the rest of the state. So our unemployment trends are going up, but not at the same rate as the state. They are slightly below — maybe 1.5 percent — where our statewide unemployment rate would be, because the metro area is more diverse in terms of the employment base, with healthcare and pharmaceuticals being a big part of that as well as logistics and transportation, and state government.

— Bill Ehrat is president of Summit Realty Group, a member of the Cushman & Wakefield Alliance.

The Corporate Reserve of St. Charles
St. Charles, Illinois

The Corporate Reserve of St. Charles

Chicago-based JCF Real Estate has begun construction for something that has gone much the way of the dinosaur lately — speculative office space. The firm is working on two single-story, 15,000-square-foot office buildings within The Corporate Reserve of St. Charles, the company’s new 50-acre business park located along State Route 64 near Randall Road in St. Charles, Illinois.

Initial plans for the project call for the two office buildings, as well as a three-story, 45,000-square-foot office building. JCF is not as sure about bringing a 45,000-square-foot building to market completely on spec, so construction of it will begin after some leasing commitments are obtained. Completion of the two office buildings is scheduled for this August.

Paul Robertson, executive vice president of JCF Real Estate, says that he was worried about bringing spec office product to market in a year like this one, but he believes there is an opportunity to develop product that is lacking in the St. Charles market. Many Chicagoland decision makers call this area home, but get in their cars every day and commute in-town to work.

“What we are trying to do is create a corporate park, which is a type of development that does not really exist in this market,” Robertson says, adding that the addition of Class A office product like this will help put St. Charles on the radar of more office users.

In addition to the spec buildings, the park will also feature build-to-suit office parcels ranging in size from 2 to 19 acres that can accommodate a building of more than 200,000 square feet. At full build-out, the $100 million project will feature more than 600,000 square feet of office space in a park-like setting. Future plans could also include restaurant, retail and hotel space.

So far interest has been good for the buildings currently under construction, as Robertson notes that his company is currently in talks with 40,000 square feet worth of tenants for just the 30,000 square feet of office space.

— Coleman Wood

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