Chicago’s retail market is probably the best performing when compared to the other property types. Activity is high due to increased consumer spending and multiple store expansions. Trends show that improvemeetn may be in store for the multifamily market as interest rates are moving up making renting a viable option to would be homeowners. The office market, while showing signs of improvement, will probably lag the overall national offie recovery by 6 to 12 months due to excess sublease space on the market and new inventory coming online. The industrial market has also shown signs of improvement.

Retail

The Chicago retail market has been one of the most interesting and active sectors of the commercial real estate industry this past year. With the office and industrial markets performing poorly, the retail market is unparalleled in terms of activity. Despite sluggish economic conditions, activity within Chicago’s real estate industry has been fueled by the growth strategies of retailers and continued consumer spending.

The expansion of stores into new locations is a recent trend in retail that is generating activity for commercial real estate. Same-store sales have slowed to 2 or 3 percent within the past year and, as a result, retailers are increasing their earnings by opening new locations. For example, Chicago only has two Target stores open within the city limits, but several more are scheduled to open within the next year. In addition to Target, other big box retailers, such as Wal-Mart, will be opening new locations throughout the Chicagoland area in the near future.

This same phenomenon is also true for The Home Depot and Lowe’s Home Improvement Warehouse, which are planning new Chicagoland locations for their stores. However, fierce competition between the home improvement giants is playing a part in where these new stores will be located. The Home Depot has a stronghold within the Chicago area, but Lowe’s Home Improvement Warehouse is currently vying for a place within the market as well. Not surprisingly, The Home Depot is concerned about its competition’s plans for growth and, as a result, is completing multiple leasing transactions in unlikely locations, hoping to block Lowe’s Home Improvement Warehouse from the market.

Another area of retail stimulating development and leasing in the real estate industry is the grocery sector. For many years, Chicago has been a two-grocery store city with Jewel and Dominick’s as the sole options. However, recent labor disputes have caused a reduction in sales and growth for the grocers. So while Jewel and Dominick’s concentrate on internal politics, several smaller chains are moving into the market. For example, Trader Joe’s, Whole Foods and Cost Plus World Market have opened multiple locations throughout the region and are gaining a regular customer base.

This expansion of stores and emergence of new retailers is driving increased development and is lowering vacancy rates — even with the bankruptcies of Wards and Kmart. (These sites have been quickly repositioned and back-filled with new tenants.) In the suburbs, greenfields are experiencing a surge in development, and the battle for big box space within the city is underway. As same-store sales are unlikely to increase, it is expected that retail expansion will continue, creating further opportunities for developers, investors, brokers and general contractors alike. In addition, as we move toward 2004, it is anticipated that rental rates will increase as occupancy levels continue to rise. Given the likely continuation of these retail trends, the Chicago area retail market will remain an interesting and unique sub-sector for commercial realtors.

— Michael Richwine is senior vice president of Chicago-based Colliers Bennett & Kahnweiler. He leads the retail division of the firm.

Multifamily

Consumer confidence is shaky, job uncertainty remains high and vacancy rates are in the double digits. So why are many of the Chicago area’s multifamily housing experts smiling these days? Well, interest rates are creeping upward, which means that renting is once again becoming a viable alternative to buying. The stock market has returned to levels not seen in more than a year, giving the industry hope that a full recovery is still possible by year’s end. Multifamily vacancies appear to have peaked at around 10 percent in most of the greater Chicago area. Rent concessions are on the decline, and demand for affordable housing has never been stronger. This combination has the words ‘cautiously optimistic’ echoing throughout the multifamily housing industry.

Despite softer conditions in both the sales and rental markets in downtown Chicago, developer interest in the area remains high. One of the biggest projects planned for downtown Chicago is Jefferson Square on Kinzie, an approximately 1,600-unit development of luxury apartments and condominiums in the Fulton River district. Construction is expected to start in 2004 and the project take 5 years to complete, which could be perfectly timed as the market continues to shift.

Apartment occupancy in suburban Chicago for the first quarter of 2003 was 91 percent, unchanged from the first quarter of 2002, according to a CB Richard Ellis report. Occupancy ranged from 89 percent in west DuPage County, where employment cutbacks in high-technology industries continued in early 2003, to 92 percent in northwest Cook County. The same report estimated 1,800 apartment units under construction in suburban Chicago in the first 3 months of 2003 compared to 3,000 units for the same period last year.

Interest rates have hovered at historic lows for the last several years but are now trending upward. As interest rates continue to rise and the stock market recovers, a case can be made that home ownership will be less appealing or out of reach for many. Recent college graduates and empty nesters will return to the rental market, creating demand for rental space.

Much development during the last several years has focused on for-sale multifamily product. Developers have taken advantage of low interest rates and the maintenance-free appeal these products offer to an aging population. Some suburban multifamily developments include Reflections in Minooka and Timber Trails in the community of Gilberts. Reflections is currently marketing more than 200 multifamily units in south suburban Grundy County, and Timber Trails is marketing a for-sale multifamily product in far western Kane County. Their success should be a good gauge of today’s market.

With rents starting at more than $1,000 per month in many suburbs and more than $2,000 per month in many city locations, affordable housing, whether age or income restricted, remains in demand. In the inner city, housing is old, outdated and in disrepair. Although there has been overbuilding in some suburbs, such as Aurora and Naperville, this housing is too expensive for many families.

As the economy plows forward, areas in infill markets should do well. Communities on the edge of the city — such as Evanston, Oak Park and Park Ridge — should see recovery in the near future, followed by communities in the next outer ring as the multifamily market continues its recovery. The infill communities have the location and density that first-time renters desire. As more jobs are created and 18- to 25-year-olds enter the housing market, many will have the income but will find homeownership — or a down payment — to be a burden, leaving renting as a good option. As the recovery continues, the outer-ring suburbs, where much of the development is taking place, will need to allow for a shift from the for-sale multifamily development to that of more traditional rental properties. As long as community leaders allow developers to adjust to demand, this should put smiles on the faces of families in need of housing, whether they prefer to own or rent.

— Matt Fiascone is senior vice president of Oak Brook, Illinois-based Inland Real Estate Development Corp.

Office

Hines is developing One South Dearborn, a 40-story, 820,000-square-foot office tower in Chicago. Sidley Austin Brown & Wood will lease 500,000 square feet of space in the building, which will be complete by late 2005.

In the traditional sense, the downtown Chicago office market is struggling. This year has been marked by constrained demand, negative net absorption, falling rents and rising vacancy rates. According to research compiled by CB Richard Ellis, the second quarter ended with a direct vacancy rate of 12.6 percent, while net absorption registered negative 98,200 square feet. When factoring in the 4.8 million square feet of sublease space, the overall downtown vacancy rate is closer to 16.7 percent.

Fortunately, recent economic indicators are forecasting improvement both nationally and in the Midwest. Although that is welcome news, an office market recovery is likely to lag gains in the broader economy by 6 to 12 months. Sublease space that is reverting to direct space also might limit statistical improvement in the direct vacancy rate during the next several quarters.

Another factor compounding matters, from the landlord’s perspective, is the significant new inventory being added to the market. Aggressive development is banking on a resurgence in demand as new projects come online during the next several years. For example, the new 47-story Hyatt Center at 71 South Wacker Drive, John Buck Co.’s 950,000-square-foot tower at 111 South Wacker Drive, and a new Hines tower at One South Dearborn will add more than 4.5 million square feet of sparkling new office space to a market currently unable to absorb new space. Citing demand for prestigious locations by professional services and law firms, developers have been able to achieve preleasing requirements necessary to move these projects ahead. Sidley Austin Brown & Wood, Mayer, Deloitte & Touche, and Brown, Rowe & Maw have all committed to major blocks of space at One South Dearborn, 111 South Wacker Drive and 71 South Wacker, respectively. These new buildings will, in all likelihood, lease up and be heralded as successes. They will also benefit aggressive tenants seeking new and efficient space in the preferred West Loop submarket.

From the tenant’s perspective, the current scenario creates opportunity. Much of the transaction activity, excluding these few, high-profile mega deals that have green-lighted the new buildings, has focused on renewals. Some tenants are looking to leverage the uncertainties in the market to renegotiate and extend leases in exchange for more favorable occupancy costs. These negotiations have driven the market’s transaction volume this year.

In the current environment, landlords increasingly show a willingness to offer tenant improvement concessions and even free rent in order to secure income streams with stable, credit-worthy tenants. The competition among Class B buildings that face significant lease turnovers during the next several years is especially intense.

At the moment, and for the foreseeable future, the West Loop remains the most coveted of the submarkets, with the East Loop and Central Loop lagging. Deloitte & Touch’s decision to vacate Two Prudential Plaza and anchor 111 South Wacker Drive is indicative of the challenges facing the East Loop. The Central Loop is also facing significant risk with ABN Amro moving to their new tower in the West Loop, as well as Bank One’s ongoing consolidation of space into fewer key locations. In short, the current market favors tenants and will continue to do so until employment levels improve and stronger demand materializes.

— Bill Rogers is senior vice president of Los Angeles-based CB Richard Ellis.

Industrial

The Chicago area industrial market has shown improvement during the past few months. The overall vacancy rate fell from 10.2 percent to 10.1 percent — its first decrease in three years. The vacancy rate for warehouse/distribution space decreased to 14.3 percent, a .3 percent decrease since the first quarter of 2003.

Leasing activity reached 4.7 million square feet in the second quarter, bringing the year’s total to 11.9 million square feet. The majority of the leased space, 80 percent, was in warehouse/distribution facilities.

Investor activity is double what it was at this time last year, with 4.9 million square feet sold in the first half of this year. More than half of all investment acquisitions were by institutions. User sales have totaled 6.2 million square feet this year, which is an 86 percent increase from last year at this time.

Approximately 8 million square feet of space is currently under construction in the Chicago market, with the majority of development occurring in Will County. The Will County submarkets experienced 60.5 percent of all the completed construction in the area during the first two quarters of this year.

— Data for the Chicago Industrial Market City Highlight provided by Cushman & Wakefield’s Chicago Area Second Quarter 2003 industrial market report.

©2003 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.