CITY HIGHLIGHT, OCTOBER 2010

CHICAGO CITY HIGHLIGHTS
Corey Chase, John Przybyla, Gregory LaBerge, Steven Weinstock, Wayne Shulman

Chicago Industrial Market

The Chicago area industrial market is struggling to fill existing building inventory. There has been a nominal amount of development in the past year and no significant speculative development is anticipated any time soon. Further, there are fewer LEED-certified buildings being built due to the increased cost. In this market, developers and users are looking at saving every penny even if it means not building a green facility.

The majority of the new developments are dedicated for build-to-suit users who will own or lease these facilities. Specific users such as freezer/cooler, healthcare, heavy office or rail users — that cannot find existing vacant product type available for their operation — are leading the trend. Some of the most significant developments through the second quarter of 2010 include Gordon Food’s new 500,000-square-foot facility in Kenosha County, Wisconsin; a 91,000-square-foot facility for Testa Produce in South Chicago; NICOR Gas’ 32,000-square-foot property in O’Hare; and most recently announced Northern Illinois Food Bank’s 150,000-square-foot build-to-suit in Geneva, Illinois. Additionally, there are some smaller spec buildings in the 10,000- to 40,000-square-foot range being constructed in the South Suburban and Northwest industrial markets.

The most active owners and developers in the area are all of the usual suspects — AMB, Centerpoint, Prologis, Opus, Liberty, First Industrial, Bridge Development, Pizzuti, McShane, IDI and Panattoni. The overall vacancy for the Chicago industrial market, which consists of more than 1.1 billion square feet and includes 13 submarkets including Northwest Indiana and Kenosha County in Wisconsin, is about 12.5 percent. The average asking rent for these submarkets is $4.50 per square foot net. Deals are being done at a significant discount due to the soft marketplace. None of the submarkets are under or over performing. Deals will simply get done by whoever can offer the best economics within a particular submarket.

— Corey Chase is a principal with Riverwoods, Illinois-based Podolsky Northstar CORFAC International.

Chicago Multifamily Market

Chicago apartment market fundamentals will continue to improve in remaining months of 2010, spurred by job creation. Employers are expected to add 40,000 new jobs by the end of the year. Payroll expansion that was choppy during the first 6 months will proceed at a steady pace through year end, especially in the manufacturing, trade, transportation and utilities sectors, generating renter demand in the near term. Additionally, Walmart plans to expand its Chicago footprint during the next 5 years, creating up to 12,000 positions. Fundamentals show greater steadiness marketwide, but improvements vary significantly at the submarket level. In the city, owners in the Gold Coast submarket continue to record tight occupancy rates and slower concession rises due to the release of pent-up Class A demand from young professionals. Competition from foreclosures and shadow rentals in the City West submarket has driven up concessions steadily and kept the vacancy rate above 10 percent. In general, renters continue to opt for more affordable units in the suburbs resulting in recent rises in both occupancy and rents.

Fundamentals have remained healthy in the city and will continue to strengthen. Vacancy fluctuated within a narrow band in recent quarters. The second quarter rate of 6.8 percent was 30 basis points lower than at the start of 2010 but unchanged on a year-over-year basis. While other major metros have suffered declines, asking rents have appreciated 1.1 percent year to date to $1,168 per month, while effective rents have improved 1.9 percent to $1,081 per month. During the second half of 2009, asking and effective rents retreated 1.5 percent and 1.9 percent, respectively. After increasing 50 basis points last year, vacancy in the city will decrease 10 basis points to 6.4 percent in 2010. Asking rents will grow 1.7 percent to $1,175 per month, and effective rents will gain 2.9 percent to $1,092 per month.

In the suburbs, the improving economy supported a 40 basis point decline in the suburban vacancy rate to 6.4 percent by mid year. During the previous 6 months, vacancy ticked up 10 basis points. So far this year, asking rents have remained flat at $961 per month, while owners have withdrawn concessions and raised effective rents 1 percent to $894 per month. Asking rents slid 1.5 percent in the last half of 2009, and effective rents fell 1.8 percent. Declining construction efforts will underpin a 30-basis-point decrease in vacancy to 6.5 percent in 2010, after the rate surged 170 basis points last year. Asking rents will rise 0.9 percent to $970 per month this year, and effective rents will climb 2.2 percent to $905 per month.

Firming confidence among small, local investors has supported acquisitions of assets with eight or fewer units. Buyers have targeted these properties in the city’s Lincoln Park and Lakeview neighborhoods due to stable renter demand, low vacancy rates and price declines. Similarly, a 12-percent year-over-year decline in the median price has generated greater investor interest for smaller assets in the close-in suburban areas of Oak Park and Glenview/Evanston. Deal flow involving large apartment properties, meanwhile, is recovering from lows recorded last year, with most buyers seeking institutional-grade properties in core locations or distressed/REO listings across the metro offered at significant discounts.

— John Przybyla is first vice president in Marcus & Millichap’s Chicago downtown office; Gregory LaBerge is regional manager of the company’s Chicago office; and Steven Weinstock is regional manager of the company’s Oak Brook, Illinois, office

Chicago Office Market

With Chicago office vacancy at its highest levels since 2005, whether the market has bottomed out is a reasonable question. On the positive side, unemployment in metropolitan Chicago shrank during second quarter 2010 to 10.1 percent, following a high of 11.7 percent in January 2010. Available sublease space has been reduced by approximately 20 percent to 3.8 million square feet since the end of 2009, suggesting that many companies have completed the disposition of excess space following layoffs.

Less sublease space on the market usually bodes well for landlords. In today’s capital-short environment, however, even landlords might prefer sublease space. While office tenants have taken advantage of rent deals for attractive sublease spaces in move-in condition, cash-strapped landlords have been off the hook for generous tenant build-out allowances.

Leasing activity continues, albeit with reduced velocity. Noteworthy downtown lease transactions so far in 2010 include Travelers Insurance, which leased 79,000 square feet at 161 N. Clark; Home/Oxford Healthcare, which is expanding into 48,000 square feet at 1 N. Wacker; SkinnyCorp LLC (Threadless), with 45,000 square feet at 1260 W. Madison; and Dyson, now expanding to 38,000 square feet at 600 W. Chicago. In the suburbs, APP Pharmaceuticals expanded to 85,000 square feet at Schaumburg Corporate Center; and PrimeSource Healthcare expanded to 77,000 square feet at Riverwalk II in Buffalo Grove.

Short-term leases are increasingly common, but are they a leading or lagging indicator of market direction? Short-term leases may mean that landlords anticipate rising rental rates. Tenants may be keeping their options open in hopes of future expansion as the economy stabilizes.

On the other hand, we may not have seen the last of rising office vacancies. Job losses in metropolitan Chicago have far outpaced declines in occupancy; so it is possible that some companies are holding excess space until their leases expire rather than taking on short-term subleases. With central business district (CBD) vacancy approaching 17 percent, and suburban vacancy in excess of 22 percent, vacancies could reach very high levels before balance is regained.

A dearth of new office development will make it easier to achieve balance in the market. The Ryan Companies’ 120,000-square-foot Rosemont Corporate Center and the 85,000-square-foot 111 Shuman Boulevard in Naperville were the only suburban properties delivered in 2010 to date. Construction of new CBD product came to a halt after the 2009 completion of 155 North Wacker, 300 North LaSalle and 353 Clark, which delivered 3.6 million square feet of Class A office space at the worst possible moment. Typical of today’s market, Hines never broke ground on the proposed 1.1 million-square-foot 444 West Lake after its initial tenant commitments were cancelled.

Citadel, PricewaterhouseCoopers, Draftfcb IPG, Fifth Third Bank, Sonnenschein, Integrys and McKinsey & Company are among the major lessees facing lease expirations in 2013 or 2014 for square footages ranging from 100,00 to 350,000 square feet. An estimated 30 tenants requiring 50,000 square feet or more also are reviewing their options. Although some of these leases will not end until 2017, now is an opportune time to review the possibilities.

— Wayne Shulman is senior vice president of corporate real estate services and office brokerage with Chicago-based HSA Commercial Real Estate.

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