CITY HIGHLIGHT, OCTOBER 2007

CHICAGO CITY HIGHLIGHTS
Edward Zifkin and Greg Moyer

Chicago Retail Market

The city of Chicago, Cook County and the surrounding collar counties that comprise the Chicagoland retail market are set to experience explosive growth for the remainder of the year and throughout 2008. Almost 10 million square feet of new retail space has opened, is projected to open or will begin construction this year, with the same amount expected in 2008. The growth is being experienced throughout most major Chicago markets, as well as in emerging areas that were vacant greeenfields just a short time ago. Yet, it is still in downtown Chicago and its adjacent neighborhoods that the transformational aspects of retail are most significant.

The Magnificent Mile is expanding to the north, south and west. Joseph Freed & Associates has undertaken two dramatic projects within the historic Chicago Loop, 108 North State Street and The Sullivan Center. 108 North State Street, previously known as Block 37, is a city block that has sought a developer since the time of the first Mayor Daley. This mixed-use project combines retail, office and residential, and is being built over a Chicago Transit Authority station that will house platforms for trains to both O’Hare International and Midway airports. The retail and residential portion of the development was purchased by Freed from The Mills Corporation shortly after construction began. Designed by Robert Johnson of Perkins & Will, the project is seeking world-class retailers that previously sought only the Magnificent Mile or Oak Street for a downtown Chicago presence.

Freed’s Sullivan Center, previously known as the Carson Pirie Scott building, was designed by Louis Sullivan around the turn of the 20th Century and is one of Chicago’s architectural gems. With the departure of department store retailer Carson Pirie Scott from State Street, this additional 250,000 square feet of retail space provides Freed with the critical mass and unprecedented opportunity to shape the face and personality of Chicago’s Loop. With the sense of place created by Millennium Park , the growing residential density within the Loop and Freed’s new developments, it is highly likely that there will be a surge of cross-shopping between the Mag Mile and the Loop.

Just south of the Loop, along Roosevelt Road, development continues unabated. Leon Joffe of Joffco has developed a new Home Depot at Roosevelt and Clinton. Also on Roosevelt, John Sweeney of JDS has creatively attacked the problem of grade and infrastructure with Southgate Market, and has brought 300,000 square feet of new retail anchored by Whole Foods, DSW, Office Depot, Cost Plus World Market and LA Fitness. Centrum Properties, with partner Angelo Gordon, is also dealing with the vexing problems of grade and infrastructure with the development of Roosevelt Collection. The project is located just west of the two-story Target at Roosevelt and Clark. The 400,000-square-foot retail component will be anchored by 90,000-square-foot Kerasotes Showplace Theater, Urban Outfitters and H&M.

West Loop Promenade, a three-level 285,000-square-foot center being developed by Gary Pachuki of IBT on the old Fannie May Candy site along the Eisenhower Expressway in the West Loop, will meet the growing demand for convenient retail services in that near-Westside neighborhood. This formerly quiet warehouse district has been transformed over the last 10 years by conversions and new construction of retail, townhomes and condos. The West Loop Promenade will be home to Chicago’s first Sundance Theater and an X-Port Fitness.

To the north of the Magnificent Mile, significant changes are coming to Oak Street, as well as Rush and State streets. M Development, led by Mark Hunt and Jeffrey Shapack, has placed a big bet on the continuing demand for luxury retail, restaurant and hotel space in Chicago’s Gold Coast neighborhood. The company purchased the old Esquire Theater building on Oak Street, as well as all the buildings along the south side of Oak between State and Rush. For the former, they are seeking zoning approval for a Mondrian Hotel and restaurant space. For the latter, M Development is creating a build-to-suit opportunity for Barney’s, which will be moving from its present location across the street at Rush and Oak. The developer has also purchased the Melvin’s on State Street, and the property at the southeast corner of State and Division, as it expands the boundaries of the community. In each of these locations, M Development is expecting luxury retailers, high-grossing restaurants and expensive boutique hotels, all uses that it feels are in scarce supply and high demand.

Along the Clybourn Corridor, M Development has purchased the triangle at Clybourn Street, North Avenue and Halsted Street in the North-Clybourn retail corridor. The transit stop on the site will be redeveloped and the portion of the property previously occupied by a gas station will become a state-of-the-art Apple store. This astonishingly successful retail corridor is expanding to the south along both sides of Halsted Street with NewCity, a mixed-use development by Structured Development that offers 400,000 square feet of retail at the site of the New City YMCA.

Consumption fatigue appears to have little effect on developers and retailers in the suburban Chicago market. Although the Midwest has been hit hard by the slowdown in the single-family housing market, retail development is a lagging indicator and the pace of development through Chicagoland will not be impacted until 2009, save for those smaller peripheral sites that rely on independent retailers to fill their spaces.

Sometimes, it feels as though Mid-America Development Partners (MAD Partners) is responsible for all the new retail development in the suburbs, but that clearly is not the case. Although the company has almost 30 developments planned or underway, with a projected GLA of almost 7.5 million square feet, other developers remain extremely active.

Older markets, once thought to be mature, are somehow coming up with space for new development or redevelopment ventures. The greater Oak Brook market, encompassing Oak Brook, Oakbrook Terrace, Lombard and Downers Grove, Illinois, is a perfect example. NAI Hiffman recently took down an older office building on Butterfield Road to build the Oak Brook Promenade, while the owners of Yorktown Shopping Center took down an obsolete Montgomery Ward’s and converted the space to a new lifestyle addition to its mall, complete with restaurants on pad sites such as Capital Grille, Ra Sushi and Claim Jumpers.

Forest City Enterprises is at work on the fourth phase of the Bolingbrook Promenade at Interstate 355 and Boughton in Bolingbrook, Illinois. Located across the street from IKEA, the more than 1 million-square-foot development boasts Macy’s, Bass Pro Shops, Barnes & Noble, Circuit City, DSW and H&M as a part of the tenant mix.

The redevelopment of the old Joliet arsenal into the country’s largest intermodal facility resulted in an explosion of industrial, residential and retail growth in Will County and throughout the region’s southwest quadrant. Markets such as Oswego, Plainfield, Lockport, Mokena, Sugar Grove, Naperville and Yorkville south and west of Orland Park, have seen unprecedented growth. In North Aurora, MAD Partner’s and The Daly Group have developed a Woodman’s Food Market, a 250,000-square-foot grocery store that shares an entrance with North Aurora Auto Mall, Target and JC Penney at the strategically located Interstate 88 and Orchard interchange. A Wal-Mart Supercenter is set to open across the street. Although Wal-Mart has cut back on its previously announced total store openings in Chicagoland, it is still on an aggressive pace and represents a significant percentage of the total net-GLA projected for the market in 2007 and 2008.

In Yorkville, Illinois, at Route 34 and Cannonball, MAD Partners and Harlem Irving are developing an 800,000-square-foot retail center. Kendall Marketplace will feature a Super Target, The Home Depot, Kohl’s, Dick’s Sporting and Clothing Goods and Marshall’s as headliners.

In the northern suburb of Glenview, Illinois, Hamilton Partners has unveiled the Willow Festival, a 417,000-square-foot shopping center with Whole Foods, Lowe’s Home Improvement Warehouse, Best Buy and REI as anchors.

— Edward Zifkin is president and principal of Chicago-based Zifkin Realty & Development/TCN Worldwide

Chicago Office Market

Economic fundamentals in Chicago remain reasonably strong and will support modest improvements in office property operations by year’s end. Rent growth across the entire market is gradually accelerating and can be expected to increase by larger increments as vacancy edges downward. As for vacancy, the rate has fallen to the mid-18 percent range in suburban submarkets due to a combination of moderate demand growth and a slight reduction in supply. Modest demand growth will enable owners to raise rents as the year progresses. As a result, asking rents are forecast to rise 3.2 percent to $26.24 per square foot, while effective rents are expected to advance 4.2 percent to $21.62 per square foot.

Meanwhile, vacancy in the central business district (CBD) appears on track to fall to less than 15 percent by year-end, as space demand remains reasonably strong and no new supply is scheduled for completion in 2007. Beyond this year, however, construction of new space in the CBD will pick up, with 4.1 million square feet slated for delivery in 2008 and 2009. Overall, completions will be up by year’s end compared with 2006. Additionally, office condo construction, especially in the outer counties of the metro area, continues to draw the attention of property owners and investors, but excessive concern does not appear warranted. To place office condo construction in perspective, the market’s total office inventory would increase only 0.3 percent if all the for-sale space slated for delivery this year came online as for-lease space instead.

A healthy economy with positive job growth has bolstered the office market. A 1 percent increase in total employment, or 44,700 new jobs, is expected by year’s end, including 18,500 positions in office-using sectors. In 2006, 19,000 office-using jobs were among the 48,000 jobs that were added in the metro area.

During the past 12 months, transaction velocity for investment sales in the CBD has increased 30 percent, and may continue to intensify in response to improving fundamentals and attractive pricing. Transaction velocity in the suburbs increased 8 percent during the past 12 months, compared with a 10 percent market-wide increase. Current cap rates range from 6 percent or less for Class A properties in the CBD to the mid-7 percent range for older assets. In the suburbs, the best Class A properties price at approximately 6.5 percent cap rates, and cap rates can run up to 8 percent as asset quality declines. Cap rates are stabilizing at current levels and may edge up in the months ahead, as interest rates rise and investors are less willing to stretch. The median price for CBD properties is $173 per square foot, up 12 percent from 1 year ago.

The median price of office properties in the suburbs is currently $132 per square foot, 9 percent higher than 1 year ago. Cap rates average from 6.5 percent for Class A assets to 8 percent for good Class B and C properties. Buyers will continue to draw distinctions between the best properties in the most difficult-to-duplicate locations and properties in other locations, where maintaining fundamentals may be challenging. Local properties, even those in submarkets with relatively high vacancy rates, will continue to attract investors to the suburbs. Comparatively affordable prices and a significant stock of large buildings enable buyers to quickly build scale in the market.

While shifts in the capital markets may impact immediate sales velocity, the long-term prospects for office investment in the Windy City remain strong. Sound fundamentals will help to sustain investors’ interest moving into 2008. Furthermore, with a healthy supply/demand balance and expectations for continued rent growth, liquidity is forecast to return to the market well ahead of the troubled residential sector. Some risk premium is returning to real estate, with cap rates expected to rise by an average of 20 to 50 basis points over the next several months. Higher-quality assets in strong submarkets of Chicago, and those with assumable or seller financing, will be affected the least. Market-wide, while increased borrowing costs and limited price appreciation will put upward pressure on cap rates, a dramatic correction is not expected.

— Greg Moyer is the senior vice president and managing director in the Chicago office of Marcus & Millichap, and Jonathan Lee is a vice president in the firm’s Chicago Downtown office.

Chicago Industrial Market

Chicago’s industrial market is expected to remain relatively stable moving into 2008. Despite a modest deceleration in employment growth this year, absorption levels are forecast to remain healthy, allowing for only a slight uptick in the overall vacancy rate by the end of the year. The distribution/warehousing sector will continue to drive Chicagoland’s industrial market, despite the recent slowdown in overall sales velocity caused by the shifts in the capital markets.

Development activity remains strong compared to historical levels and builders’ confidence in the market is evident, as approximately 70 percent of construction starts last year involved speculative projects. Growth in the Chicago industrial market has been most pronounced in the Southwest/Interstate 55 corridor and west suburban submarkets, where available land is most prevalent. Leasing activity has failed to keep pace with the significant rise in inventory in the Southwest/I-55 corridor, however, causing this submarket to post the highest vacancy rate within the Chicagoland area. The west suburban submarket has fared better, with vacancy well below the metro average. Marketwide, the distribution/warehousing sector continues to be the primary driver of the region’s industrial market, as wholesale trade is the leading industrial employment sector. Additionally, Chicago is now the third-largest intermodal container handler in the world after Hong Kong and Singapore. The manufacturing sector continues to show weakness, which has dampened occupancy among manufacturing and R&D/flex facilities.

Despite some pockets of temporary weakness, sales volume is strong, and investor confidence will remain high. Underscoring investor confidence is the level of out-of-state buyers entering the Chicago market. Out-of-state investors purchased nearly $700 million of industrial properties last year, representing 30 percent of the total dollar volume. By comparison, just 4 years ago, sales to this investor group totaled only $220 million, or 22 percent of volume.

New supply will total 12.5 million square feet by year’s end, a slight decline from 2006 and well below the peak of 18 million square feet in 2005. Completions will outpace absorption, resulting in a slight increase in vacancy to 11.2 percent, up from 10.8 percent in 2006. Asking rents are expected to rise 2.7 percent to $4.54 per square foot by the fourth quarter of the year, after posting a gain of 3.6 percent in 2006.

Despite more restrained economic expansion, international trade volume will continue to drive demand for industrial space. Major ports continue to set records for container volume, a trend that is expected to persist as the dollar’s weakness in relation to foreign currencies supports international demand for U.S. exports.

Warehouse vacancy has steadily declined since 2004 to its current level of less than 9 percent, and development remains below historical averages. Over the next 3 years, inventory is forecast to rise by an average of 1.8 percent annually, compared to 2.3 percent per year from 2000 to 2006. With vacancy largely in check, owners will continue to achieve rent growth, with the strongest gains anticipated in coastal port markets.

While shifts in the capital markets may impact immediate sales velocity, the long-term prospects for industrial investment in the Windy City remain strong. The area’s low cap rates have attracted out-of-state investors. While Chicago cap rates are the lowest in the Midwest at 7.4 percent, they are still well above industrial cap rates in coastal markets.

— Greg Moyer is senior vice president and managing director in the Chicago office of Marcus & Millichap.

CONSTRUCTION UNDERWAY FOR ROOSEVELT COLLECTION The Shops at Roosevelt Collection will feature approximately 50 retailers, and will be anchored by a 16-screen theater. Construction is underway for Roosevelt Collection, a 1.2 million-square-foot, mixed-use center located in the heart of Chicago’s South Loop. When complete, the development will consist of approximately 300 condominiums and 600,000 square feet of retail space, anchored by a 16-screen theater. The center is located in a key area of the city, with 55,000 area college students within walking distance of the Roosevelt Collection, and more than a quarter of the 700,000 people employed in Chicago’s central business district working within 1 mile of it. Roosevelt Collection is designed with a grand boulevard running down the middle of the development, with retailers and residences flanking it on each side.  The residences will feature amenities such as stainless steel appliances in the kitchens, European cabinetry and granite countertops. The retail component of the development will feature approximately 50 retailers, including a fitness center and public health club. Roosevelt Collection will also feature a 3-acre public park that will host events such as concerts, street festivals and farmers markets. The project is being developed by Centrum Properties, with RTKL Associates providing design services. Completion is scheduled for spring 2009. — Coleman Wood

METROPOLIS COMING TO THE SOUTH SIDE The Metropolis Capri Capital Partners, along with Judson Investment Company, is developing The Metropolis (pictured, right), a mixed-use development currently in the planning stages in Bronzeville on the near south side of Chicago. The project is expected to include between 300,000 and 400,000 square feet of retail, including a grocery anchor. The residential component will include more than 100 condominium residences located above lower-level retail space in two mid-rise buildings. The retail will surround a large public-use park. Skidmore, Owings & Merrill is providing design services; CB Richard Ellis is handling the leasing of the project.

City of Chicago Retail Facts Provided by Mid-America Development Partners LLC Behringer Harvard has purchased 10 and 120 South Riverside Plaza as part of its recent Chicago portfolio acquisition. • Total retail sales grew to $22.4 billion in 2006, from $20.7 billion previous year • General retail sales increased by more than $307 million in 2006 • Increase attributed to Wal-Mart, Target and Kohl’s new stores, along with department stores’ improvement • New residential development downtown driving retail sales • Food stores sales in the city increased by $79 million during a period of consolidation

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