When history looks back on Chicago many years from now, undoubtedly the mid-1990s leading into the new millennium will be remembered as an era in which the city with big shoulders re-established its prominence by creating new jobs, redeveloping neighborhoods and attracting more families.

On a recent visit to the Windy City, NREI toured the area one mile southwest of Chicago's CBD, which serves as a microcosm of the city's comeback. The 125,179 sq. ft. South Loop Marketplace, a grocery-anchored shopping c enter that stands on the former site of the 1910 Soo Line Terminal Building, serves as the dominant retail center in the area.

Selected as the "Retail Development of the Year" in 1997 by the National Association of Industrial and Office Properties (NAIOP), the South Loop Marketplace is owned by Soo T LLC. (The Reliant Group, Chicago, is also a principal in Soo T.)

Meanwhile, the surrounding area is undergoing intense residential redevelopment, new construction and loft conversions. Development plans for the area call for 10,000 new residential units in 46 separate developments that will house approximately 22,000 people.

That's but one neighborhood undergoing a major change in this ethnically-diverse city. With so much activity taking place, much of it involving the dot.com world, NREI recently gathered some of the best and brightest in Chicago's commercial real estate community for a roundtable discussion at the Ritz-Carlton Hotel. The purpose of the meeting was to gauge where the industry may be headed in the short term, both downtown and in the suburbs. An edited transcript follows.

NREI: It's evident that the city is experiencing renewed vitality, from State Street to points west and south of the CBD, both residential and retail. Aside from a robust economy, how is it that Chicago has been able to achieve this resurgence. What's been the catalyst?

Ty Tabing: The good thing about working in city government is it's very exciting to have an aggressive mayor [Richard M. Daley]. We have a robust economy, and we have mayor who has a vision for the downtown area. And that is to make it as "neighborhoody" as possible with all the ancillary services, as well as the retail and, of course, the residential.

I am looking for a place downtown myself, and last weekend I went to a development at Washington and Wells called City Center. I was talking to the broker about the demographics of people who were purchasing in this development, and he said it was roughly one-third who choose to have a second place in the city so they could come down and enjoy the culture offerings downtown. Another third are businesses that want to have a place centrally located for clients or employees who are staying late, and thirdly, it was professionals who want to eliminate their commute. That's pretty representative of the types of people who are coming downtown.

In a robust economy, with lots of dot.com happenings in the downtown area, it's a very exciting place to be, and I think that the reality is that the suburbs can't compete with that sort of vitality.

Andre Lerman: To echo what Ty said, clearly the service-industry growth in this economy is a major driving force in the job market in downtown Chicago, which drives up demand for the highly-educated professionals in their 20s and 30s who are coming into town. If you think about Chicago as a housing market for that demographic segment, it is much more affordable than, for example, Manhattan. If you are a 20- or 30-something, and you are in a certain salary range, you can afford to live in a cosmopolitan neighborhood near downtown Chicago. The strong economy is really driving demand for the service-industry workers, and that's driving the demand we see for the residential, including the supply, former loft buildings and new development south and west of downtown.

NREI: Where are the retail voids, if you will, the niches that need to be filled in the wake of all this residential growth?

Edward Zifkin: The obvious areas that lack services are still in the West Loop and on the South Side. The South Side is just beginning to receive the attention it deserves from the national retailers who've been avoiding them for so many years. The project that Hiffman Shaffer did in the South Loop at the Dominick's-anchored shopping center caught a lot of people's attention. That Dominick's is the No. 1 [best sales performer] Dominick's in Illinois. I had a meeting with a guy from 115th St. and Halsted who was showing me a piece of property down there, and I asked him where he went grocery shopping. I learned that he drove 112 blocks to buy groceries. That underscores how underserviced that entire market is. With the type of retail sales results that Target and The Home Depot are seeing on the North Side, retailers are beginning to understand that there is a huge untapped market in the greater Chicago area, and the one place which has not been expanded and developed is the South Side.

NREI: What do you think the catalyst has been for the downtown's resurgence?

Mark Christensen: It really comes back to one fundamental point: You are wanted in the City of Chicago. Developers are appreciated, and generally speaking we can go and talk to the city and get things done. The Department of Planning and Development is approachable. The aldermen are growth- oriented, by and large. And everyone's following the lead of the Daley administration. And everybody's worked together to basically start the redevelopment of Chicago's industrial, retail and residential base.

The extensive use of financial incentives, I think, has made a big difference. I think those incentives have been important to accelerating what has happened. To redevelop an obsolete industrial or residential product is really a risk-reward kind of situation for a developer. And if the opportunities are there, the developer will take action to make these products available. Look at a South Loop that HSA did; it was a risk-reward. The residential developments that were constructed there started out on a smaller scale and got bigger when the momentum began.

Zifkin: I would like to add one thing to what Mark said. The city has been extremely proactive. Most of the developers that I know who have been active in the last few years in Chicago, as well as our company, have been approached by different people in the city at different times who ask: "What do you think of this corner? Could you redevelop this, and how would you redevelop this?" Projects are being brought to people who have been active and shown an interest and a commitment to the city. I think that is extremely unusual, but it really is very illustrative of the proactive stance that the city has taken.

NREI: A portion of State Street that had been closed to traffic was reopened a few years ago. What's been the net effect?

Tabing: Well, it's been doing very well. It's brought folks back down to State Street and really allowed the development to take place all along State Street. It's pretty easy, with the exception of Block 37, on the north end to attract people to State Street. The problem has been the southern end, and we have some pretty exciting projects that are coming up.

A pretty telling example of the city's aggressiveness is the southwest corner of State and Adams, the Century Building. The gentleman who owned the property was approached by the city a few years ago and asked to upgrade the building. It was maybe 30% occupied, and it was a real blight on the entire street. This gentlemen wasn't interested. And so six months ago the City, fed up, said it was going to acquire the property and issue a request for proposal (RFP) and get something done a little more suitable for the direction State Street is headed. The RFP was due last week, and we had three very exciting responses, one of which was a new hotel. Another proposal was for a residential conversion concept, and a third one was for a dormitory.

NREI: Mike, in preparing for this roundtable, I talked with you about how retail follows residential. You described to me how office follows as well. Can you elaborate?

Michael Duncan: I live on Berlin Street in Lincoln Park. There are 53 kids younger than 7 on my block. Last night I was at a school board meeting. We are doubling the size of our school, and the capital campaign is under way. What you see is a real growth of families. With that comes a well-educated labor pool, and as we all know, companies put their offices where the labor pool resides so you don't have 90-minute commutes. What you have with the burst of Bucktown and the rejuvenation of Old Town and Lincoln Park is a diverse, well-educated labor pool that's adjacent to the city [where a lot of new development is occurring].

NREI: The John Buck Co. is currently developing One North Wacker. Can you give us an update as to how that project is proceeding?

Duncan: One North Wacker has benefited from the moves toward technology. There are a number of tenants who are being forced out of mid- and even late-1980s developments that were more speculative in nature. Those buildings don't have the infrastructure that people are requiring today, and tenants are willing to pay a premium over the basic rents.

Now how deep that pull is, we really don't know. But if you look at 175 W. Jackson, which is being converted from the old insurance exchange, it has become a technology building with big floor plates, lots of riser capacity. As a result I think you are seeing almost an explosive growth. The issue now we are all wrestling with is securitization. Can we accept these relatively new companies that don't have an earnings history, and how do you securitize that?

That's probably the biggest issue in leasing office space right now: How do we become flexible enough to keep the dot.coms? One North Wacker right now is about 35% leased, and in the next 45 days we will announce leases that will take it up to about 65%. We're confident that building is going to open 100% leased.

NREI: John Goodman, since joining Julien J. Studley in 1985, you've managed transactions totaling more than 4 million sq. ft. in downtown Chicago. Please give our readers nationally an assessment of the overall health of the downtown office market.

John Goodman: The way we look at the market is how much space is there that is available to sign a lease on today. Overall, in downtown Chicago we have our availability rate at 15%, and that is for Class B- and Class-A space. The West Loop, which obviously is the hotbed for activity right now, on the development side, is at a 21% availability rate.

Now I'm the first one to tell you that I think some of those figures are misleading. The reality is the demand is phenomenal. I would have guessed that the figure at One North Wacker in 45 days or 60 days might be closer to 80% leased. So I'm even more bullish about it than you are, Mike.

If you just look at the numbers, you'd say we are not in a equilibrium, we are actually in an overbuilt market. The reality, though, is that when you look out in the marketplace, there's huge activity. Subleases come on the market that have phenomenal activity. We are seeing from sublease spaces that we handle - which for several years have been difficult spaces to lease - that we are having several showings a week in almost any building, some with terms of only three or four years remaining. Traditionally that would have been a real challenge to sublease.

I think that right now there is equilibrium; it is a fairly balanced market. There are some large tenants out there who are reportedly close to anchoring what would be two more new buildings. If that happens, I think that virtually overnight we could have a shift in this marketplace.

I don't think what we are going to see what happened in 1993 and 1994, when vacancy rates doubled and tripled in some submarkets, and effective rents fell $10 to $15 a foot. But I think we could see some correction if we see two more buildings.

NREI: It doesn't sound like you are bullish on office.

Goodman: I think the industry's stable over the next year or two. In the technology sector, to go back 12 months and look forward 12 months there will be somewhere in the neighborhood of 3 million sq. ft. of new technology companies to downtown Chicago or the peripheral area. I think that growth at a minimum makes up for the downsizing of the corporate tenants, and could account overall for a net increase in absorption for downtown.

Mark Powell: To give everyone a bit of an update, divine interVentures (a Chicago-based company that serves as an incubator for Internet start-ups) has put together its own real estate group. It has hired Cece Conway away from LaSalle Partners, and they did it as a twofold project. One was to manage the companies that would be in the incubator space that Divine has, and also to represent the companies that will be coming out of the incubator space, which could be numerous over the next several years.

NREI: Does anyone else have something to say regarding the downtown office market as it relates to the dot.coms?

Philip Utigard: My concern is that as an industry, I'm not sure that we're being responsive to the Gold Rush that is going on, both from a product and services standpoint. I'm not sure that just putting in the infrastructure into the building is responsive to what 50% of the demand is out there, and what this mega-trend of high technology is looking for.

We can't miss many of these mega-trends, particularly in a cyclical business such as ours.

You look at the product, and for the most part it's institutionally owned. Those institutions are looking for long-term leases. They are looking for service securitization, they are looking for certain credit. They don't want to encumber the building with expansion options, contraction options, the things these type of firms (technology companies) need.

And my worry is that we are in a situation right now where we have high demand for these companies, and we have a got a decent supply. When that (supply) wears off, what is going to happen with these technology companies?

Zifkin: I think Phil hit it on the head. With respect to the dot.com and technology companies, there are issues regarding length of lease and flexibility. In the case of EthnicGrocer.com [a Chicago-based online grocer], initially they thought they were going to need 25,000 sq. ft., and then realized they needed 50,000 sq. ft. Then they realized very quickly that they were going to need 100,000 sq. ft., and they might be at 200,000 sq. ft. at the end of the year.

One of the issues that we had in trying to keep EthnicGrocer here, as opposed to taking them out to San Francisco, is that in San Francisco they've adapted to that explosion by developing much more flex space and working out different types of securitization issues. And I don't know how we are going to deal with that.

Randy Podolsky: The answer is largely found on the West Coast, and we are behind the times. You are not going to securitize deals anymore like you once did. There are a lot of law firms downtown, that if you want to build new office buildings and rent them to law firms, you might find that you can do things the way you used to.

Building flexible space and giving flexible terms to start-ups is the only way we will survive and grow as we move forward over the next five to 10 years. This [emergence of the dot.coms] is far greater and far faster moving than the industrial revolution was. You need to build space that's relatively generic, although extremely high-tech and very adaptive. For instance, office space will have all the wiring, all the panels, all the lighting in place. A company that can no longer grow in your space is going to go elsewhere.

Be willing to take stock, warrants or options in a dot.com. Look at business plans; pick the right business partners; take some additional risks.

We are doing a deal right now on a sublease for a major bank. A dot.com is taking the space. Don't kid yourself, there is a nice, hefty security deposit there to back up the tenant improvement (TI) commissions that are being spent. But there is not that much securitization beyond that. Until they stabilized, you are seeing nothing but money being spent, and burned out the door. That lease is being signed as we speak, and we did get a security deposit.

NREI: How will consolidation of the dot.coms factor into the equation?

Podolsky: The consolidation of dot.coms is going to be no different than the consolidation of law firms, real estate firms and banks. When you acquire a new business, the rules really don't change, whether you are in the electronic world or the real estate world.

NREI: Let's move along to suburban office. Steve Kling, could you provide us with an overview?

Steve Kling: There are several dot.coms actively looking for space. The securitization is a big issue. One of the things that was not mentioned is that maybe these companies with the burn rate should be trying to find spaces where limited investment is required. It seems that a lot of them are still out there looking for the space the way they want it and at the terms that they want.

Well, it's a whole different market [in the suburbs]. And what they are up against in the suburbs right now is substantially lower availability rates. A lot of the sublease space that hit the northwest suburban market has been absorbed, and a lot of the new space that is under construction currently has been absorbed.

There are a lot of companies out there that absorb space all the time. Motorola, for example, has absorbed a lot of space in the suburbs. AT&T, TCI and Lucent Technologies - look at the park they are building, it's tremendous.

There is great demand for space in the suburbs. Sure, there are some soft spots, but there always have been. You can zero in on Oakbrook Terrace, where there is a tremendous amount of space coming on line, plus some space that's been given back with some mergers, consolidations and relocations. But if things continue, it's going to absorb, which I feel puts additional pressure on the dot.coms because they are going to have to be flexible; they're going to have to figure out how to securitize these leases.

NREI: How many dot.coms are there? We keep talking about dot.coms as if they are dominating the landscape.

Kling: I can think of 10 right now that we are looking at in just our small portfolio of properties that we manage and lease.

Podolsky: There are 100,000 new dot.coms launched every week.

Zifkin: A lot depends upon where the venture capital money is coming from. In the case of EthnicGrocer, if we couldn't have found somebody here who was flexible and find the right situation, they would have been on a plane to California. So that alternative exists. If we're inflexible, the dot.coms are not going to stay in Chicago, they'll go somewhere else.

Lerman: In some of the service industries, there are different alternative structures being set up. One alternative is to, in lieu of cash today, take an equity stake in some of these dot.coms. Do you see that as an option in the Chicago market?

Podolsky: It's already happening. The entrepreneurs are better poised today to do that type of exchange than some institutions, and that's not to say the institutions won't adapt.

John Gates: We started running across this three or fours years ago and developed a very flexible lease structure, particularly for technology companies.

There's an internal tension, at least in our part of the world, with a lot of these companies. On one hand, they are investing more per foot than a typical industrial building. It's no longer just racks and a couple of forklifts. There are all sorts of electronic infrastructure, maybe bigger office usage. And as such, they typically want a somewhat longer lease to amortize this over and also avoid the vicissitudes of market rent changes when they have this big embedded investment.

On the other hand, they don't know where they are going to be in two years, and so the other part of the tension is that they want a shorter lease.

What we've done is embed in virtually all of our leases the ability to get out of the space so long as you move to another CenterPoint building that either exists, or we will build for you. We build 3 to 4 million sq. ft. of build-to-suits a year. We have a large land inventory, so we can accomplish this in eight to nine months. And that's worked out particularly well.

Given this flexibility, the quid pro quo is that they've got to make us whole on the space that they are leaving until such time as we find a tenant who leaves us whole, that leaves us basically in the position that we were in before.

But again, with a very large portfolio, and a lot of internal movement, as well as a market that has 35 to 40 million sq. ft. in activity every year, we can usually get comfortable, and they can get comfortable, with the fact that the alternative tenant is going to be there in a reasonable course.

NREI: Give us an overview of the industrial market. Is it in equilibrium?

Gates: The Chicago market includes 1.25 billion sq. ft. of industrial space. It's quite large. We divide it up into 24 submarkets, the majority of which are in equilibrium. There are a couple of small markets, typically in the fringe areas, that are somewhat overbuilt at the moment. But they constitute collectively maybe 5% of the overall inventory.

Rents by and large are flat. We're certainly not seeing any rental spikes anywhere in particular, broadly speaking. Because you are an equilibrium, the trends are driven by a tremendous focus on labor, unlike I've ever seen in my 20 years in this business. There's a tremendous focus on infrastructure. A great deal of metropolitan Chicago's infrastructure is operating at capacity. So people are looking for new infrastructure and to be close to that when they find it. That's driving a lot of the absorption that's out there.

I think you are seeing the margin for error in spec construction decline dramatically. Costs are going up, whether it's interest rates, land or construction, and rents aren't moving with it. So, if you've got a spec deal today, you have to hit a homerun to make any money on it. That is beginning to cause a cessation of new construction in many submarkets.

NREI: How's your stock price?

Gates: We were up about 14% last year; we were up 4% to 5% the year before. We've averaged, over the six years we've been public, a compounded annual rate of return of 27%.

John Petrovski: That is even more remarkable when you look at your competitors.

Gates: We've been very fortunate. We've had a good market

NREI: How do you account for that? What are you doing right?

Gates: A long time ago, we realized that the focus is not how many square feet you own, but how fast you are growing your earnings per share. A REIT is no different than any other company that's publicly traded. A lot of our peers decided to go on a major buying binge and issue far too many shares to loop their existing share holders.

We took a different tact. We have been very active in generating internal capital. The answer is, we haven't issued a lot of shares. We haven't done a public stock offering in 3 1/2 years. And yet we have focused on adding a lot of value to our customers, and that's allowed the revenues to grow at a rate that can create that kind of per share growth.

Robert Winter: The issue on the flex lease not only comes up with dot.coms, but with any company that is growing. We are in a position where we have a lot of land in our various business parks, so we can do that. With 400 acres, you have land to do spec development, you have land to do build-to-suits, as you see growth of your own tenants.

Let's not forget, we are really building a home for these people, and if you manage it properly they are going to want to stay with you. And that's happened in a number of cases where companies have had some options, but they really wanted to stay within the park and stay with us.

In negotiations for a major deal, two issues came up. The first issue was the letter of credit. It got pretty hot and heavy there for a while, and the guy asked if we would accept cash instead of a letter of credit.

And the second thing that happened was that we had to have them occupy as soon as yesterday or they wanted us to take a penalty. "By the way, when you build out our space, would you put up the demising [dividing] wall, because we are not sure how much space we really want?"

When you hear a comment like that from someone whose business is moving so fast and you know they are not making any money, you are concerned. Well, I'm concerned because we are trying to collect rent, pay the mortgage and build up equity value. That's the basics of our business.

NREI: Jonathan, do you care to jump in with a comment?

Jonathan Malm: I think that over the next 10 to 15 years, the often overused phrase of "location, location, location" will be replaced with "labor, labor, labor."

We are talking about some very valid issues of expansion for the dot.com companies, or any company today, as well as the issue of securitization. I think another variable we should take into account is that labor is really the driving force behind this. As we're in the final stages of cutting our deals, I hope we realize we could do more with our rent in that it becomes a small item relative to the big picture, and it often helps offset the yield or risk side of accommodating the growth or securitization.

NREI: In a tight labor market, does the city offer more of an immediate pool of labor vs. the Chicago suburbs?

Malm: It creates almost an insulation factor to the location within the city. I think that in addition to the economy and all the incentives the city's provided, it's one of the key driving elements.

Gates: From an industrial standpoint, probably the single-biggest phenomenon that I've seen in my career is companies increasingly wanting to move back into the city, particularly for major people-intensive manufacturing or assembly locations. It's not just the labor. The cooperation of the city government has been terrific. There's infrastructure, especially transportation infrastructure, in the city that is now in very high demand, particularly the rail infrastructure, which does not currently [comparatively] exist in the suburbs. Both for e-commerce reasons and other reasons, that intermodal infrastructure is becoming very attractive.

Lerman: If you look at the traffic flow during rush hour, there's more traffic leaving the city than coming in. There is an extremely tight labor market for lower- and middle-level workers among companies that have operations in the suburbs.

Our firm is working with developers and people in the finance area in the area of affordable housing, tax-credit, Section 42-type housing. This is not public housing, this is housing for people who work for a living. The developers qualify for these government tax credits, and there is activity on Capitol Hill right now to expand the level of those tax credits and make them more available to Section 42 multifamily developers. It has gotten some support across the board. Each of the suburban communities must recognize that if it wants to build an industrial base, it needs to have some room where people who work here can live. (For more details on legislative efforts regarding affordable housing tax credits, please turn to Page 74.)

Podolsky: I think Jonathan's right with regard to labor. It will be a bigger word in the future than location. What it means is the whole supply and demand model that we are accustomed to will be built around people not wanting to commute because the infrastructure does not exist to the degree we'd like it to.

What you are going to find is that the development is going to be driven by where the labor markets are and vice-versa. Residential will build where there's office; office will build where there's residential; industrial as well. We are working with a client regarding 350,000 sq. ft. of office space. The client's biggest driving factor today whether it is going to relocate -and if so where - is all about labor.

Powell: I agree completely. Typically we are modeling into the overall occupancy cost, the attraction/retention percentile, along with what it costs to retrain an employee if you lose an employee. We start to model that in and one location may be much cheaper on the face of it, but it may be much more expensive in the end if you look at the attraction/retention issues.

Winter: One trend that we see on a daily basis concerns parking requirements in our office buildings. It used to be that we were able to do four spaces per 1,000 sq. ft. and have some left over. The minimum now is five spaces to 1,000 sq. ft. We have three build-to-suits call centers, and the ratios are seven and eight spaces to 1,000 sq. ft. You add that into a [business] park and you recognize the amount of traffic coming from all directions to get there. It's adding to the burden you already have.

Malm: I don't think I am disagreeing with you Bob, but I think I would like to qualify that whole parking issue. Certainly within a business park, there is a lot more demand for five to seven cars per 1,000 sq. ft. at these high-density operations. But when you look at multi-story office, you go to the top level of all these parking structures and there are all kinds of spaces available. They are empty.

Podolsky: But you can't build 3.3 spaces per 1,000 sq. ft anymore, or 3.9 per 1,000 sq. ft. I agree with Bob; it's just not there. Parking is becoming a pivotal key in a lot of negotiations, We are seeing a lot of 5-to-1 deals in the suburban office site.

Malm: Frankly, I think it's perception and broker driven. It's almost an insurance policy on the lease in the event they ever put more people in their spaces. But they're not. In a 250,000 sq. ft. office building, they are not using all the parking space. It's 3.8 maybe 4.0. Again, they are not using all the available space.

Nikki Block: I wanted to talk a little bit about the reverberating effects of the emerging dot.coms. What it's really generating is tremendous logistic requirements. You are probably very aware of that John

Gates: I actually would have to completely disagree with you. To date it's been much more ink than square feet. Many more pages have been published on this than actually has been occupied on this. It is rapidly growing.

You have to remember, e-commerce is primarily distribution, which accounts for 70% of the overall industrial inventory out there in metro Chicago. Of that, maybe 2% or 3% of that is now e-commerce firms, although growing quite rapidly.

Of those e-commerce firms, 97% to 98% of their business has come out of the hide of some other distribution channel, retail or business-to-business format, according to Forrester Research studies.

Relatively little new net demand thus far has come out of e-commerce. What you have seen is an increase, although quite small, in activity. As one of these firms begins to grow, it typically takes business away from another existing format, and they will want to shrink. And what we expect to happen over time as e-commerce is expected to grow is a fairly significant increase in activity level. Some may be shrinking, some may be expanding, but without much net new demand for industrial space.

NREI: There are two people we haven't heard from yet, Greg Moyer and John Petrovski. Greg, Marcus & Millichap is widely known as the investment sales specialists. Can you talk to us a little bit about the velocity of transactions in the multifamily and REIT sectors?

Greg Moyer: What we are seeing this year is continued sluggishness and investment activity from the REIT sector. Filling that void has been continued investment from individuals and entrepreneurial investors.

The challenge in the market is rising interest rates. As interests rates have gone up, the cost of debt has gone up 100 to 150 basis points over the past 12 to 18 months. Sellers have not adjusted. Rents have not gone up as fast as interests rates have gone up. Sellers have not lowered their expectations of value in the market. Buyers in certain product types have just begun to lower their expectations of value in the market, so cash flows based on the same cap rates as a year ago are lower today because the cost of debt is higher.

Will buyers buy for less cash flow today in some segments of the market? Absolutely, because what's come with increased interest rates and all the equilibrium that I have been hearing around the table is pressure on rents.

So, in certain sectors there is unprecedented pressure on rents in the Chicago marketplace. As we've seen in the multifamily sector, there's been very little construction over the past three to five years in relation to the size of market in Chicago and the growth we have experienced. But we still have not really pushed rents in multifamily because we've lost tenants as a result of all the condominium development and redevelopment that has gone on in Chicago. The cost of owning a $200,000 condominium today vs. a year ago is 20% more today because interest rate have gone up so much.

The affordability between the cost of ownership of residential vs. renting is widening. As it widens, pressure on rents goes up. We anticipate this year in certain pockets of Chicago that we will see a 6% to as much as a 9% rent increase, where we've been tracking 3% to 4% rent increases in prior years. It sounds like some pockets of office have a lot of pressure on rents as well. Because of that pressure on rents, buyers will buy and pay for properties and accept lower cash flows going in this year.

NREI: Any other trends, Greg?

Moyer: There are some new financing vehicles that the markets are demanding in order to bridge this gap, where a lot of securitized mortgages were put in place four or five years ago with interest rates at that time at 7%. Today, it's 8 1/2% debt to make these deals work. There has been some appreciation in those assets, and a lot of these mortgages preclude people from prepaying them, which locks investors into holding the real estate.

We are seeing some new product that is going to bridge those gaps on the conduit of securitized mortgages so buyers can still come in with some leverage and take advantage of interest rates two years ago, which were 7%.

NREI: In this global world of commercial real estate, can you offer a perspective of the financial markets going forward ?

Petrovski: I think I am the only lender at the table, but certainly not the only investor. We are both - an investor in some cases, and a lender on real estate. I think real estate has had a good run the past five years, and we are seeing a little bit of a plateau, this equilibrium. That's good news because we don't see the dip.

But the bad news is that the pace of appreciation is going to be slower. I think doing debt, going forward, is going to be a good product on real estate. The trouble is the demand will be a little slacker because interest rates are higher. I think on the investment side, we're seeing slimmer profit margins on investment proposals in real estate.

For the clients you may be selling properties to, it's more difficult on their Excel spreadsheets to pencil out their profit margins than it was three years ago.

I think George Orwell had it right with Big Brother in "1984". Only Big Brother is not the government, it's the Internet. The information is everywhere and more transparent. I think that the question is: How do you compete in a slimmer-margin, transparent age?

As you look at where capital is going, a lot of the investment banks that used to come to us, to invest money with us in real estate, are saying, "We are off to Asia, and we are off to discounted loans in Japan." They are chasing their higher margins.

Dot.coms have delivered the growth on Wall Street. That, we all agree, is somewhat of a bubble.

A good parallel is the automotive industry at the turn of the century. If you have time, walk through the exhibit of the history of the automobile industry in Dearborn, Mich., and look at a chart that shows in 1920 there were 100 automobile companies. But by 1950 there were a handful. Did the industry go away? No. Did the employment in the industry die? No. Did the number of companies go away? Yes.

NREI: Any predictions for the coming year?

Christensen: People are going to have to remain very nimble and quick, as difficult as that can be in the real estate business. The evolution of the economy and the nature of the beast of our tenants -telecommunications and the like - are going to force us to become even more flexible.

Mark Christensen Executive Vice President

HSA Commercial Real Estate

Chicago

Michael Duncan Executive Vice President

John Buck Co.

Chicago

John Gates CEO

CenterPoint Properties Trust

Chicago

John Goodman Executive Vice President/Regional Manager

Julien J. Studley, Chicago

Steve Kling Senior Vice President

Grubb & Ellis Co.

Rosemont, Ill.

Andre Lerman National Director of Marketing/Sales

American Express Tax

and Business Services

Chicago

Jonathan C. Malm Vice President

McShane Corp.

Rosemont, Ill.

Greg Moyer First Vice President/Regional Manager

Marcus & Millichap

Chicago

John C. Petrovski Group President

Heller Real Estate Finance

Chicago

Randy Podolsky Principal

Podolsky Northstar Realty Partners

Riverwoods, Ill.

Mark Powell Senior vice president

Equis Corp.

Chicago

Ty Tabing Assistant Commissioner

State Street Coordinator

City of Chicago

Philip Utigard Executive Vice President

Corporate Advisory Services

Transwestern Commercial Services

Chicago

Robert Winter President and CEO

AMLI Commercial Properties

Itasca, Ill.

Edward Zifkin President and Principal

Zifkin Realty & Development LLC

Chicago