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Downtown Office Market Strengthens

by Chicago Agent

By Ginger Downs, IOM, CAE, Chief Executive Officer, Chicago Association of Realtors

With a focus on retail, office and the apartment market, much good news stemmed from CommercialForum’s recent Forecast for Chicago’s Commercial Real Estate Market.

The panel consisted of:
• Todd M. Caruso, senior managing director, retail services, CB Richard Ellis
• Jonathan Lee, regional manager, Marcus & Millichap
• Mark Parrish, senior VP, Grubb & Ellis
• Bill Rolander, principal & co-director of the Product Leasing Group, The John Buck Co.

Suni Karim, CCIM, commercial/investment committee chairperson, moderated the event.

“Job growth is necessary for the apartment market,” Jonathon Lee said. “Forty-thousand new jobs are expected, specifically in the western suburbs.”

This translates to a “fairly robust environment” with 62 percent of investors expecting a rent growth in 2007. Apartment vacancies have steadily decreased in the last few years, from a 6.7 percent vacancy rate in 2004, to 5.3 percent in 2006. A projection of 5.1 percent is forecasted for 2007.

According to data from Marcus & Millichap, between 2002 and 2007 Chicago’s median home price has jumped 32 percent, while the national average is at 25 percent. What this means for Chicagoans, however, is not as favorable; the housing affordability gap has once again widened, with the 2006 median mortgage payment at $1,077, up from $660 in 2002.

Lee foresees a favorable outlook for Chicago in 2007, citing cap rates expected to be stable and price increases in line with revenue gains. “Chicago doesn’t even rank in the top 10 of most expensive markets,” he said.

Todd Caruso focused on the retail sector on the local and national level. “By 2020, one-third of the population will be in their retirement years, causing a heavy desire for leisure and restaurants; most store emphasis will be in the Sunbelt,” Caruso said. “Lifestyle centers are becoming very popular.”

“Retail vacancy in the Chicago metro area is at about 17 percent and has been very healthy,” Caruso said. “The Internet will not do away with bricks and sticks. Though a lot is on the drawing boards, not all of it will be delivered.”

Caruso forecasts flat to negative rent growth near term, gradual increases in overall vacancy rates, overall returns decreasing from 22 percent to 13 percent, and developments returning to their rightful owner.

Mark Parrish touched briefly on the industrial market but focused mainly on the office market, noting that the industrial market in the Chicago area is six-times the size of the office market. Industrial vacancy rates are the lowest since 2000, with sales prices up more than 20 percent. The industrial market consists of an 80-mile radius around Chicago, which is experiencing a cap rate of 7.5 percent, compared to 7.08 percent, nationally. The cap rate is expected to fall as demand continues to rise.

According to data from Grubb & Ellis, the Central Business District (CBD), which consists of 121 million square feet of office space, is experiencing the lowest vacancy in 12 quarters, and the fifth-straight quarter of positive net absorption. No new deliveries are expected until 2009, with the exception of Block 37, and the merger of the Chicago Board of Trade and Chicago Mercantile Exchange could put 200,000 square feet on the market.

“The reverse commute has become very unpopular,” Parrish said, citing relocation of major companies from the suburbs to the CBD. “We’ll see continued migration to the city. This could become a pretty tight landlord’s market. [The year] 2007 will continue to be a strong year.”

Bill Rolander also covered the CBD office market, noting that vacancy is decreasing, demand is increasing, and capital markets remain favorable.

“The Sears Tower has the best infrastructure; it would be cost-prohibitive today to build that same building,” Rolander said. “But, a lot of companies don’t want to go there after 9-11, and many companies have left. The West Loop may become the new office hub since it is centered around transportation,” Rolander said.

Like Parrish, Rolander noted the trend of companies relocating to the Chicago CBD, and how companies used to leave the city because the suburbs were cheaper.

“Coastal cities have experienced much more investment increases, so many investors who couldn’t buy on the coasts came to Chicago to spend their money,” he said. “Plus, there is available land in Chicago with teardowns.”

Though each speaker provided a different presentation, there was one underlying theme: Chicago’s commercial market is experiencing a favorable market, and the forecast for 2007 looks good.

The Chicago Association of Realtors (CAR), “The Voice for Real Estate in Chicago” since 1883, represents the business interests of more than 17,000 real estate professionals in the Chicagoland area. CAR is led by a voluntary board of directors, elected by the membership, who works in partnership with a professional administrative staff.

 

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