Are happy days here again in real estate?
By: Ryan Ori and Alby Gallun
After a half-decade slog, Chicago’s commercial real estate market is on the verge of something unseen since the recession: across-the-board growth.
“We’re clearly a market out of boom-and-bust mode,” says Robert Kramp, research director for the Midwest and Great Lakes at Chicago-based brokerage Jones Lang LaSalle Inc. “It’s more of a mature market. We’ll see growth in the single digits, but it’s sustainable.”
Even one of the biggest laggards, suburban offices, shows signs of life. That comes on top of almost bubble-like growth in downtown apartments and hotels.
The pain isn’t over for everyone, of course. Outdated suburban office campuses and shopping centers in far-flung or less-affluent areas still face a long road back. Add it all together, though, and the regional view is significantly brighter than it was at the market’s nadir in 2009 and 2010.
“Broadly speaking, we see a recovery in Chicago and room for more,” says Mary Ludgin, director of global investment research at Chicago-based investment manager Heitman LLC. “We tell our clients there’s room to run.”
Unused warehouse space is at its lowest percentage since the end of 2007. Retail vacancy plunged to a five-year low in the first quarter before an upward tick. Apartment high-rises are charging record rents, and 5,200 new units are arriving downtown this year and next.
Downtown office vacancy has fallen from its mid-2010 peak, and sale prices of skyscrapers are rising with competitive bidding. Hotels have almost completely bounced back, with Chicago-area room rates forecast to hit pre-recession levels this year, according to PKF Hospitality Research LLC in Atlanta.
New York-based research firm McGraw-Hill Construction’s projected 7.4 percent bump in local
construction volume—to $7.5 billion, the most since 2008—is welcome in an area where employment continues to trail the national average. Some anecdotal evidence of job growth is already apparent: From their post-crash lows in 2011, Los Angeles-based CBRE Inc. grew its roster of local brokers by 12.7 percent last year and Jones Lang LaSalle added 5.3 percent, according to Crain’s research.
Hiring in real estate and other industries would fuel consumer spending and in turn spur more real estate leasing and development.
Confidence already is high enough to put trophy structures up for sale. John Hancock Center’s sale—in four separate transactions—and a 50 percent sale of Schaumburg’s Woodfield Mall valued those properties at more than $1.4 billion combined, while the 1,639-room Palmer House Hilton could fetch $500 million.
While the suburban office market is probably still years away from pre-recession vacancy rates of less than 20 percent, even distressed properties are luring suitors, leaving them with enough cash to make improvements that will attract new tenants. Five multitower office campuses—some with gaping vacancies—have sold or are set to sell so far this year for more than $220 million combined.
Chicago-based investors Walton Street Capital LLC and GlenStar Properties LLC spent $58.5 million for the three-building Continental Towers complex in Rolling Meadows. The venture touts room for new towers. That would have sounded far-fetched a few years ago, but a dearth of large, top-quality space could open the door.
“In 2009, everyone was wondering when the pain was going to end,” GlenStar Principal Michael Klein says. “If you’ve got a land site today, there are (tenant) brokers calling to ask about it.”
Also in the northwest suburbs, Dallas-based Lincoln Property Co. paid $23.5 million for the three-building Greenspoint Office Park in Hoffman Estates. That’s $47 per square foot, far less than it would take to develop it now.
“If you can buy quality assets substantially below replacement cost and the product has performed in the past, people will take a swing,” says Chicago-based Lincoln executive John Grissim.
Warehouses have sprung back enough that speculative construction has returned. “We’d like to have rents moving (up) faster,” says Steven Poulos, principal at Chicago’s Bridge Development Partners LLC, which has five smaller warehouse spec projects under construction or set to start here. “It’s not frothy by any stretch.”
There also is progress in retail, especially in dense, well-heeled city neighborhoods. The Loop retail vacancy rate, for instance, hit a 10-year low last year, according to Stone Real Estate Corp., a Chicago-based brokerage.
Prices for high-end properties are soaring, too: New York-based Thor Equities LLC recently agreed to pay $154 million, or $1,627 a square foot, for the Barneys department store building on Oak Street, 32 percent more than Israel’s IDB Group paid in 2011.
Yet it still feels like a recession at suburban shopping centers in secondary locations.“The ‘A’ centers and ‘A’ locations are commanding some of the top rents, but the ‘B’ centers are struggling,” says Ramzi Hassan, vice president at Edwards Realty Co., an Orland Park-based investor. “The only good thing at those properties is that the rents have stopped dropping.”
Edwards recently paid $10 million for a 49,000-square-foot shopping center in Orland Park, which was hit with a $16.9 million foreclosure suit in 2010. Yet finding distressed assets has become a lot tougher for vulture investors, another sign that the market is getting back on its feet.