Although the worst is probably behind Chicago’s office market, the rebound will likely be gradual.
The 21st Century started brightly for commercial real estate professionals in Chicago and across most parts of the country. A sustained economic expansion during the previous decade helped make 2000 a record-breaking year in almost every statistical category. Those days, however, seem like a lifetime ago. After a challenging 2 years, where does the office market stand today?

In downtown Chicago, the mid-year availability rate of almost 19 percent — defined as space being actively marketed and available for occupancy within 12 months — has shown little change during the most recent quarter. Weak demand, coupled with a significant inventory of sublease space, has resulted in lower asking rents. And in the suburban Chicago office market the story remains the same, if a bit dimmer, as illustrated by a mid-year availability rate in excess of 23 percent.

The story is not all doom and gloom for Chicago, though. For one, the diverse local economy insulates the real estate market from the wide swings experienced on both East and West coasts. The rapid deterioration in market conditions has stabilized and the downward spiral, marked by huge layoffs and subsequent sublease announcements, has waned. Barring a double-dip recession or an external event that derails the economy, additional significant negative net absorption is not anticipated for the office sector.

Furthermore, a moderate level of leasing activity is re-emerging, being driven by leases that will approach maturity over the next few years. Many corporate users with significant space requirements have been deferring real estate decisions or implementing shorter-term solutions. Now these companies’ leases are expiring, forcing everyone to act at once. This has released some pent-up demand that is being reflected by increased leasing activity.

Developers also remain confident in the long-term viability of the office market. Despite rising availabilities, several high-profile projects have been announced, including: a “topping off” of 175 W. Jackson Blvd.; a Steven Fifield project at 550 W. Adams St.; expansion plans to Union Station; a Development Resources office tower in the Southwest Loop; a Higgins Development Partners/Pritzker Realty Group project on Wacker Drive; and the John Buck Company’s plans for a new tower at 111 S. Wacker Dr. All the recent major proposals — aside from Donald Trump’s 1.3-million-square-foot mixed-use tower proposed for the site of the Sun-Times building — desire to be near the transportation hub in the West Loop submarket.

The flurry of proposals for the West Loop illustrate that developers believe this submarket will remain a coveted location for years. But with more than 4.2 million square feet of Class A space available for lease in the area at mid-year 2002, developers are anticipating that positive net absorption will accelerate over the next several years. It remains to be seen when and which of these projects will become a reality and what impact they will have on the West Loop submarket.

The economy will be the decisive factor in determining the sustainability of any recovery in the Chicago office market. If the economy can gain a foothold, the office market should see renewed demand a few quarters after growth reemerges in the broader economy. The heady days of early 2000 may not be around the corner, but better times are likely ahead.

- Michael Klein, executive vice president, Insignia/ESG, Inc.

Could there be a better market for retail real estate than the city of Chicago? Whether you’re a retailer, owner, developer, broker, or an acquisition or disposition specialist, Chicago offers great density of population, diversity of neighborhoods, terrific labor supply and efficient transportation. Most importantly, great merchants can achieve great sales. How good is the city of Chicago? Let’s look at the success stories.
State Street
Nordstrom Rack anchors the redevelopment of State and Washington with a 42,000-square-foot, three-level store. This project, led by Smithfield Properties, is adjacent to the new Sears store, and in addition to Fields, Carson’s, Borders Books & Music, Old Navy, Filene’s and T.J. Maxx, is further evidence of the strength of State Street.
Uptown
North of Belmont and Wrigley Field at Addison, a redevelopment boom is in the beginning stages. Jos. Freed & Associates has renovated the former Goldblatts building at Broadway and Lawrence, anchoring it with the ever-pioneering Borders Books & Music. The city of Chicago, recognizing the potential of this area, has issued requests for quotations for Wilson Yards between Montrose and Wilson, west of Broadway. Home to an eclectic mix of residents and income levels, Uptown is ripe for retail investment.
North Michigan Avenue
North Michigan Avenue’s panache is heading south, to and over the Chicago River. The Wrigley Building is re-inventing itself, Hard Rock Café is under construction, Shorenstein Realty Service is retenanting the Prudential Center and Andalex is building on the unused air rights over Illinois Street at 444 N. Michigan Ave. Together with Oak and Rush streets, Michigan Avenue creates a $1.6 billion shopping district unparalleled for its quality and adjacent mix of cultural, residential and professional offerings.
Englewood
Lost in the recent economic boom of the last few years, this south side neighborhood will be home to a new City of Chicago College at Halsted and 63rd Street. Recognizing the untapped retail potential of this area, the City of Chicago, in conjunction with a consortium of local businesses, has engaged Smithfield Properties to create a modern shopping district along Halsted between 59th and 61st streets.
UIC Campus
Now is the time to go back to school. A Harlem/Irving, Mesirow-Stein joint venture is developing in and around the University of Illinois-Circle Campus. Crucial to the development is a new retail corridor at Halsted Street and Roosevelt.

- Stanley Nitzberg, Principal, Mid-America Real Estate Corporation

Due to the lingering after-effects of the manufacturing industry’s economic downturn, the Chicago industrial market is soft. There is a large supply of vacant space and developers are increasingly reluctant to break ground in some submarkets on speculative construction projects. Vacancy rates in the marketplace have climbed to 9.5 percent, up from 8.9 percent one year ago. Approximately 3.1 million square feet of current industrial product being developed is speculative development, compared to nearly 4 million square feet last year, and only 3 percent of that development product is pre-leased.

The softness of the Chicago industrial market, along with the excessive supply condition, have yet to force any significant decrease in rental rates. The net average asking rates for manufacturing/distribution industrial product is $4.30 per square foot this quarter compared to $4.26 per square foot for second quarter last year.

Monthly indices reported by the Institute of Supply Management indicate encouraging growth rates in the national manufacturing business sector, as they have for several consecutive quarters. The Chicago industrial market has benefited from these favorable conditions, but not to the extent where new hiring, substantive expansions, or increased capital investment have signaled a real, sustainable recovery. Speculative development will not increase substantially until a sustained economic recovery is fully realized.

“While softness still seems to be the dominant theme in the marketplace, much of the recent activity has been fueled by mergers and acquisitions, not by growth,” said Bruce Granger, senior vice president with Grubb & Ellis’ Industrial Services Group. “I see many companies just trying to hang on until the economy can get actual growth started again.”

However, some Chicago submarkets are seeing an increase in speculative construction, including the I-55 Corridor, Central Will, Fox Valley, North Kane and West Cook. Due to aggressive tax incentives, attractive land parcel pricing, access to transportation and less stringent zoning issues than downtown Chicago, these are the submarkets to watch for more significant activity in the future.

“The I-55 Corridor has been seeing an increase in activity over the past few months and I expect that trend to continue,” said Jack Cozzie, senior vice president with Grubb & Ellis’ Industrial Services Group.

“Developers who had previously put speculative projects on hold are now beginning to move forward again.”

When compared to the stops and starts of the speculative construction market, build-to-suit projects have continued at a rapid pace. These projects will increase base inventory, but have little effect on availability rates because they are fully leased. From an economic standpoint however, the impact in these markets will be substantial — especially the Ford Supplier development in the south Chicago submarket, expected to create nearly 1,000 new jobs.

- Michael J. O’Hanlon, Regional Managing Director, Central, Grubb & Ellis Company

“Over the past 8 years, the majority of the rental apartments developed in the Chicago area have been in the suburbs,” says Steve Ross, executive vice president of development with AMLI Residential. “In fact, most of the apartments that have been developed in the suburbs have been in DuPage County, which is located directly west of the city.”

The lack of rental apartment development downtown is due to the fact that in Cook County, which encompasses downtown Chicago, real estate taxes are much higher for rental apartments than condominiums, Ross explains.

Even in the suburbs, however, it is often difficult for developers to get the proper approval to build rental communities. On average, only about 2,000 to 3,000 apartment units are built each year.

“The Chicago suburbs are anti-growth, anti-multifamily, restrictive zoning markets,” says Ross. “Each town and village in the Chicago area has control over its zoning, and most of them are anti-density and anti-rental apartments.” Much of the new rental development over the last 8 years has occurred in two suburban cities: Naperville and Aurora, which are located in the far western portion of DuPage County.

AMLI looks for suburban in-fill locations on which to build luxury multifamily projects. “If a community or village is going to let one luxury rental project be built in it, we want to develop that project,” says Ross.
Two examples of this are projects in Woodridge and Lake County. AMLI is currently developing AMLI at Seven Bridges, the first mid-rise multifamily buildings to be built in the Chicago suburbs in over 10 years, according to Ross. AMLI at Seven Bridges is part of a mixed-use community in Woodridge called Seven Bridges. “They wanted something that was high-quality, and we delivered it. There won’t be another rental project done anywhere near this one for several years — or maybe ever,” Ross notes.

In Lake County, north of Chicago, AMLI has a parcel of land fully zoned for luxury rental apartments. The community is being built in a village called Vernon Hills. “They view the rental apartments as ‘condo-like,’ which makes the community feel better with what we’re presenting to them,” says Ross. It will be three mid-rise buildings, and we will have no competition.”

Condo Market

“Although Chicago’s condominium heydays of recent years have cooled, and there is not quite enough current demand to absorb all existing product quickly, most projects are still ringing up sales at a reasonable pace — and in some cases, at a very good pace,” says Michael Newman, president and CEO of Golub & Company.

Good locations downtown include, to varying degrees, the submarkets surrounding the Loop — the Gold Coast, River North, River West and the South Loop — and certain close-in neighborhoods with good access to mass transit.

“A recent study by Appraisal Research Counselors substantiated our belief that condominium sales in Chicago’s booming South Loop are outpacing the rest of the city,” notes Michael Tobin, managing director of Northern Realty Group. Of the 632 new construction condominium sales reported last quarter in six neighborhoods adjacent to the Loop, 228 were for South Loop units, according to reports of the study.

“Although other neighborhoods, including River North and the West Loop, have larger total and available inventories of new condominium units, it is the South Loop that is really the fastest-selling area,” Tobin says.

“For condominium projects in the suburbs, we like sites in upscale communities where existing residents, many of them empty-nesters, want to downsize and simplify their lives,” says Newman. “Within The Town of Ft. Sheridan in north suburban Highland Park, we are now in the final sales phase of the first of two 50-unit buildings comprising The Ravines Condominium. We expect sales for the second building to begin shortly. This is the only new condominium project in Chicagoland that directly overlooks Lake Michigan.”

Early next year, a joint venture development of Northern Realty Group, Mesirow Stein Real Estate and Near North Properties will begin construction of the mixed-use State Place, which will have 243 condominium units in four buildings above a 65,000-square-foot, ground-level retail complex and two-level parking facility. Already, the project’s mid-rise units are 50 percent pre-sold, while the high-rise units are nearly 40 percent pre-sold.

“Would we recommend undertaking additional South Loop projects at this time? Probably not, as the area has a sufficient supply of product to absorb for the time being. But in the coming years, this area offers enormous potential for new multifamily development,” Tobin says.


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