Downtown Chicago could have as many as four new office towers within the next two years, a strong indicator as to the heights the commercial real estate market has scaled in this robust cycle.

But questions remain about the depth of the overall leasing market and whether the new buildings, plus chunks of space being put back on the market, will be absorbed quickly or lead to a slight oversupply.

"Right now there's about a 15% vacancy if you include all the space on the market," says Jacque Ducharme, who is president of New York-based Julien J. Studley Inc.

In February, Houston-based Hines Interests LP announced plans to build a 37-story, $150 million office building at 191 N. Wacker Drive. The Chicago-based law firm of Gardner Carton & Douglas has been named as the anchor tenant, taking about 200,000 sq. ft. The building is scheduled to be completed in 2002.

"New buildings will command the top rents," says Greg Van Schaack, vice president at the Chicago office of Hines Interests.

Currently under way is a 1.3 million sq. ft. building at 1 N. Wacker Drive, a project of the John Buck Co. The third major building that will probably get built is a 37-story, $305 million office building at Dearborn and Adams streets. A joint venture of Prime Group Realty Trust and Chicago developer J. Paul Beitler, the building would be anchored by Bank One Corp.

It has also been reported that Chicago-based Quaker Oats Co. may anchor a 1.6 million sq. ft. complex on the corner of Clinton and Monroe streets in Chicago's West Loop area. This project would likely be built in three phases by local developer Steven Fifield.

Meanwhile, developer Scott Toberman has announced plans for the world's tallest building at 7 S. Dearborn St., though it has been reported that Toberman hasn't obtained financing yet.

"The Chicago market has had huge job growth," says Fifield, president of locally based Fifield Companies Ltd. "The market has been absorbing more space than is being built." In addition to the proposed building for Quaker Oats, Fifield's company has a 370,000 sq. ft. Loop building under way at 550 W. Washington St., which will open in May about 80% leased.

Three other relatively small office buildings are either under way or just beginning construction in the downtown area. One of those is Dearborn Plaza by Lincolnwood, Ill.-based The Alter Group. "This is not the traditional downtown building," says Matthew A. Ward, vice president of The Alter Group. He explains that the building is leasing the majority of its space to advertising firms and new technology ventures.

According to a year-end report from New York-based Cushman & Wakefield, the overall downtown vacancy was 10.5%. Net absorption for the year was 1.7 million sq. ft. Class-A vacancies stood at 5.5% at year's end, compared with 5.6% at the end of 1998.

Rents are holding steady. However, Ducharme says, "Rents are not up like they were the year before." He pegs rents for Class-A space at $30 to $40 per sq. ft. (gross).

Rents aren't expected to rise much this year, due to the amount of space coming on the market. Not only are new buildings under construction, but a handful of big, old buildings also are being renovated and re-leased. One example is 175 W. Jackson with 1.4 million sq. ft. of office space.

Big chunks of sublease space hit the market as several major corporations left Chicago or downsized. "In 1999, the big office lease deals were companies consolidating, not expanding," says J. Frank Francese, director of Cushman & Wakefield.

About 300,000 sq. ft. of space was left vacant at 100 N. Riverside Plaza after Morton International Inc. was purchased by Philadelphia-based Rohm and Haas Co. Also, Amoco Corp., which was acquired by London-based British Petroleum Co. PLC, vacated about 600,000 sq. ft. at the former Amoco Building, 200 E. Randolph St. Chicago-based Aon Corp. subleased 515,000 sq. ft. in the building, which was renamed the Aon Center at the end of 1999.

"There are a lot of opportunities for tenants. The question will be: How much can downtown tenants grow?" asks Mark W. Parrish, senior vice president with Northbrook, Ill.-based Grubb & Ellis.

Arvid A. Povilaitis, senior vice president of Chicago-based Equity Office Properties Trust, believes office vacancies need to be put into perspective. "The amount of vacant office space is still a small percentage of downtown Chicago's base of 115 million sq. ft."

Investment sales were slow in 1999 after prices peaked in 1998, according to a report from Grubb & Ellis. The retreat of REIT buyers, flat rental rate growth and increasing money rates were cited as reasons for the slowdown. Capitalization rates for Class-A office space were 8.75% to 9.75%, according to Grubb & Ellis.

Two high-profile office developments were also put up for sale. Newark, N.J.-based Prudential Insurance Co. of America announced its intention to sell the Prudential Plaza. Brokers expect the two-building complex to fetch about $175 per sq. ft., or about $350 million.

Also, Bermuda-based Overseas Partners Ltd. is seeking a buyer for 333 W. Wacker Drive. Experts think the building will sell for $180 per sq. ft., or about $150 million. Late last year, Dallas-based Prentiss Properties Trust bought 123 N. Wacker Drive for about $170 per sq. ft. The building's largest tenant was Aon Corp., which is in the process of moving, leaving 123 N. Wacker nearly empty.

Suburban office market In the suburbs, new construction pushed up office vacancies to 10.5% from 8.6% at year-end 1998, according to a report from Los Angeles-based CB Richard Ellis. The fourth quarter of 1999 alone saw the opening of 13 new speculative properties. The total absorption for the year was 2.2 million sq. ft., down from 2.7 million sq. ft. in 1998.

"This is still quite an active market," says Jeffrey S. Barrett, managing director of CB Richard Ellis. "The Class-A space is enjoying strong leasing. The greatest challenge for property owners is in the Class-B buildings where demand is a little softer."

Suburban rents and vacancies vary greatly by submarket. The O'Hare submarket is the tightest for tenants. According to year-end statistics from Grubb & Ellis, the Class-A vacancy rate was less than 3% in the O'Hare market. As a result, three new buildings were announced, even though land for development is scarce.

For example, construction has begun on a two-building, 350,000 sq. ft. office development in Rosemont by locally based Higgins Development Partners. One of the buildings has been pre-leased by Franklin Park, Ill.-based Dean Foods Co.

"Available space is being absorbed quickly," says James Purinton, president and CEO of New York-based ORIX Real Estate Equities Inc., which plans to build a two-phase office development in Rosemont, near O'Hare International Airport.

DuPage County, which comprises the so-called East-West Corridor, registered more than 1.4 million sq. ft. of completed construction in 1999, according to figures from Cushman & Wakefield. Indianapolis-based Duke-Weeks Realty Corp., for example, is finishing Central Park of Lisle II with 303,246 sq. ft. Three high-tech companies recently signed leases for space in the building.

"Tenants are getting good deals in the East-West market," says Susan Rosen, senior director of Cushman & Wakefield. East-West corridor office rents average about $22 per sq ft. (gross).

Five new projects are under way in the Schaumburg/Northwest market where the year-end 1999 vacancy was about 12%, according to Cushman & Wakefield.

"There is no reason to wave the white flag," says Van Schaack of Hines Interests, which is building the Woodfield Preserve project with 320,000 sq. ft. in Schaumburg. He says developers won't back off on rents but may offer small inducements to help tenants with "hangovers" from previous leases.

Investment capital is readily available but buyers are having to look harder for those much sought-after properties with upside potential, brokers say. Sales activity in 2000 should equal activity in 1999, which was down from 1998 levels.

"Interest rates are climbing, and we are anticipating some inflation," says Randy Podolsky, principal of Riverwoods, Ill.-based Podolsky Northstar Realty Partners. "We expect some slowdown in the next 12 to 24 months."

Industrial market humming "Industrial buildings in the Chicago area remain among the most preferred investment properties," says Charles Krawitz, vice president at LaSalle Banks NA, Chicago. He notes that industrial building vacancies remain low while manufacturing has stayed strong in the Midwest. And as long as the economy continues to perform well, industrial properties should continue to be an investor favorite.

According to figures from Cushman & Wakefield, year-end leasing activity reached 37.5 million sq. ft. Although 15.5 million sq. ft. was added to the market, year-end net absorption totaled about 18.4 million sq. ft. Overall vacancies were about 5%, and rental rates increased during 1999 to $4.43, up from $4.09 at the end of 1998.

"The market is hot," says Jacob Kieferbaum, president of Kieferbaum Construction Corp., Deerfield, Ill. "Companies are flush with money. We thought we could never top 1999, but this year we are already up 20%." Kieferbaum expects to complete 36 buildings this year.

According to Grubb & Ellis' year-end report, about 10 to 15 million sq. ft. per year of industrial product has been built over the past five years. The vast majority of this space has been high-cube, big-box buildings.

Submarkets with available land continue to drive development activity. Will County, southwest of Chicago, had 5.3 million sq. ft. of new warehouse/distribution construction in 1999 with another 2.6 million sq. ft. currently under way.

Pizzuti Cos. finished a 409,000 sq. ft. speculative building in southwest suburban Joliet at its Southfield Business Center. The company expects to break ground this spring on another spec building with 470,000 sq. ft.

"Corporate America wants to centralize," says Patrick E. Gallagher, senior vice president of Pizzuti. "We are focusing on logistics for large users." Gallagher believes e-commerce will continue to have a major effect on the industrial market as users demand more distribution facilities.

Atlanta-based Industrial Developments International Inc. (IDI) has 2 million sq. ft. of spec space in eight buildings under way in Will and DuPage counties. Michael Cushing, senior vice president of the Midwest region for IDI, expects spec development to continue in the southwest suburbs of Bolingbrook, Romeoville and Joliet. "There's still land there," Cushing says.

Rosemont, Ill.-based Opus North Corp. has several spec buildings under way or just completed. At Butterfield Center for Business & Industry in west suburban Aurora, a 320,047 sq. ft. spec building was completed last November. It is 50% leased to Oakland, Calif.-based Clorox Co. Construction of another spec building with 505,333 sq. ft. will begin this summer. Opus also completed a 458,620 sq. ft. spec building in near west suburban Melrose Park. It is 40% leased.

Rents should stay flat in the North DuPage and Bolingbrook submarkets, according to John S. Gates Jr., CEO of CenterPoint Properties Trust, Oak Brook, Ill. He predicts a slowdown in spec building there because of increased costs for land, building materials and financing. High costs coupled with flat rental rates means "there's a small margin of error for developers," says Gates.

Gates believes most users are focused on the availability of good labor and the quality of supporting infrastructure, such as roads and rail service. "Fifty percent of the new construction is build-to-suit activity."

"The build-to-suit market has been incredible," agrees Jeanne Rogers, executive vice president of Arthur J. Rogers & Co., Des Plaines, Ill. "Users can get a quote on a building in 48 hours."

Grubb & Ellis estimates that build-to-suit development totaled 1.5 million sq. ft. and owner-build development was slightly more than 1.9 million sq. ft. in 1999. Elise Couston, principal, Paine/Wetzel ONCOR, Chicago, says some small company owners are joining together to construct industrial buildings in which ownership is shared something like a condominium.

Building prices rose about 10% to 20% in 1999, according to Jack Rosenberg, senior vice president of Rosemont, Ill.-based Colliers, Bennett & Kahnweiler. He expects prices to climb again in 2000 because of a low supply of suitable existing buildings. Depending on location and property condition, building prices are $30 to $65 per sq. ft.

"The only good opportunities for users who want to buy property are in obsolete buildings that can be modified," says Rosenberg. Land prices are rising, especially for desirable in-fill locations near Chicago.

Rosenberg says outlying land - as far away as Huntley, a distant northwest suburb - may cost only $2 per sq. ft. Closer-in suburban land, such as a parcel in south Lake County, costs as much as $6 per sq. ft. There, only about 50 acres remain undeveloped out of 1,500 acres set aside for industrial users.

Retail faces uneasy future Somewhat out of favor as an investment, retail properties have been a subject of concern because of the growth of e-commerce and increased competition among existing and new retailers.

Chicago's retail market continues to be incredibly competitive, according to David Bossy, president of Oakbrook Terrace, Ill.-based Mid-America Real Estate Corp. And yet, he says, "The market has remained resilient." New retail construction fell over the last year.

According to a report from Mid-America, new retail space that opened in 1999 totaled about 2.8 million sq. ft. Retail expansions accounted for another 1.1 million sq. ft., bringing the total to about 3.9 million sq. ft. This compares to a total of about 4.5 million sq. ft. of new construction in 1998.

"New development is being driven by grocery-anchored centers," says Bossy. Almost half of the new retail developments included food stores, according to Mid-America's report. Dominick's Finer Foods and Jewel Food Stores, both of which were bought by large food retail companies, continued to drive most of the new development.

Hot retail areas to watch for more new development include:

* the Route 59 corridor in west suburban Aurora/Plainfield;

* the Randall Road corridor in Batavia; and

* the Clybourn corridor on Chicago's north side.

A year-end report from CB Richard Ellis says the overall shopping center vacancy rate declined to 7.8% in 1999 from 8.5% in 1998. Neighborhood/community centers, the largest sector, accounting for about 73.7 million sq. ft., registered a year-end vacancy rate of 7.8%, a drop from 8.4% in 1998.

Vacancies in unanchored strip shopping centers dropped to 11.3% from 12.6%. Power centers posted a 1999 year-end vacancy rate of 1.2%. Todd Caruso, managing director at the Lincolnshire, Ill., office of CB Richard Ellis, says no sizable power centers have come on line since 1997.

A power center is being developed by HSA Commercial Inc., Chicago, in south suburban Orland Park. Robert Smietana, president of HSA, says the 700,000 sq. ft. project, which was formerly an enclosed mall, is already 70% leased. Kohl's and SportMart are the anchor tenants.

Rents in grocery-anchored centers range from $15 to $20 per sq. ft. (net), according to Michael Wesley, principal of Edgemark LLC, Oak Brook, Ill. "These properties are in demand from tenants," says Wesley. "It's a no-brainer to get them leased."

Wesley pegs power center rents at $12 to $15 per sq. ft. (net), adding that some of the small-shop space in those centers is a "struggle" to lease.

At the larger regional malls, rents are going up, says Adam S. Metz, executive vice president and CFO at locally based Urban Shopping Centers Inc.

Urban owns and operates big malls, including Water Tower Place in Chicago and Oak Brook Mall. "Merchant sales are up 6% to 7% this year, and rents have gone up that much this year," he says.

Metz adds that e-commerce is still a small part of the overall retail picture. Urban recently completed a renovation of its Fox Valley Mall in Aurora and it plans an expansion of Old Orchard Mall in Skokie with new theaters, restaurants and an additional parking garage.

Empty big boxes, vacated by defunct retailers, have been getting re-leased. According to Mid-America, 2.5 million sq. ft. of big-box space was re-leased in 1999. This compares with about 4.3 million sq. ft. in 1998. New retailers taking space include Value City, Hobby Lobby, The Home Depot and Office Depot, among others.

Also, two high-end home design stores are entering the Chicago market. The Expo Design Center, with stores of about 93,000 sq. ft., will open six or seven outlets. Sears plans to have at least three area The Great Indoors (TGI) stores with 135,000 sq. ft. each.

Downtown, shopping patterns along Michigan Avenue may change radically when Nordstrom opens its new store in September on the south end of the street. The store will anchor the John Buck Co.'s North Bridge project, which has been under construction for several years.

"Nordstrom may end up being the most influential department store in the city," says Bruce Kaplan, president of Northern Realty Group, Ltd., Chicago.

According to Northern Realty's most recent survey, vacancies along Michigan Avenue are starting to decrease slightly. Retail vacancies peaked in 1999, reaching about 5.7%. That was up from a vacancy of 1.3% in 1998.

"The street seems to be returning to its retailing roots, instead of becoming an entertainment destination," says Kaplan. For example, AnnTaylor opened an 11,000 sq. ft. store at 600 N. Michigan, space that was formerly occupied by a Viacom store that closed last January.

State Street, the other big downtown shopping district, has several new retailers. Borders opened a new 25,000 sq. ft. store at the northwest corner of State and Randolph streets.

Meanwhile, discussions continue regarding the future of Block 37, a long-vacant parcel in Chicago's Loop that has been converted into an ice rink/art gallery. It has been reported that Lord & Taylor or Barnes & Noble may anchor a new development there.

Hotel market remains strong "The fundamentals of Chicago's hotel market remain strong," says Bill Gudenau, managing director, Insignia/ESG/Hotel Partners, Chicago. "The long-term prognosis looks great."

According to Gudenau there were some concerns about hotels several years ago when it appeared that the market might overheat. "Everyone has been cautious. Growth has been judicious, and the new product is being absorbed," he explains.

The average daily rate (ADR) was $160 in 1999, compared with $156 in 1998, according to figures from E&Y Kenneth Leventhal Real Estate Group, Chicago. The current occupancy rate is 74%, relatively unchanged from the previous year.

"Downtown is still a great place to be. There is still room for more growth," says Scott K. Steilen, Midwest practice director of hospitality at E&Y Kenneth Leventhal.

Steilen figures Chicago could handle another 5,000 rooms based on a full convention calendar and a rosy outlook for downtown as a tourist destination. About 3,000 rooms opened in the past two years. Another 1,500 rooms are under construction.

There is some concern that the luxury segment could overheat. Three new luxury hotels are expected to open this year: the Park Hyatt (200 rooms) opens this month across the street from Water Tower Place; the GrandBay Hotel (310 rooms) will open at John Buck's North Bridge project; and a new Peninsula Hotel (340 rooms) will open on Michigan Avenue, just across the street from the Park Hyatt.

In February, St. Louis-based Adam's Mark Hotels announced that it will build a 1,594-room hotel between Illinois and North Water streets, immediately north of the Sheraton Chicago hotel. The $300 million Adam's Mark would be the largest hotel to be built in downtown Chicago in 20 years. Financing has not yet been arranged.

Several smaller hotels are under way. For example, a new Embassy Suites is being built at Grand and Fairbanks streets. Hostmark Hospitality Group plans a Renaissance Suites Hotel at Dearborn and Ohio streets.

In the city's largest hotel sale of the year, the Marriott on Michigan Avenue, which recently underwent a $40 million renovation, was sold for $175 million to the Carlyle Group and LaSalle Hotel Properties, both based in Washington, D.C.

The Marriott is adjacent to the new North Bridge complex.

"Chicago is the largest convention destination in the country," states Jon E. Bortz, president and CEO of LaSalle Hotel Properties. "We believe it will continue to grow."

"Sale prices have stayed firm," says Steilen. "It's difficult now for investors to find good opportunities." There were a handful of small hotel transactions, including the sale of the Quality Inn at Halsted and Madison streets. The hotel will be converted into a Crowne Plaza.

"The suburban hotel market is good," notes Robert J. Cataldo, president and COO of Schaumburg, Ill.-based Hostmark Hospitality Group. He expects a slight increase in suburban occupancies for the year.

Probably the most active suburban market is the O'Hare Airport area. A new 200-room Hyatt Hotel will open in Rosemont. And a 369-room Doubletree Hotel will open this month.

Developers say they like the location near O'Hare Airport. They also could be counting on business from a new casino that may get built in Rosemont.

Apartments stay full Last year, there were 30 sales of multifamily properties with 100 units or more, a relatively high number of sales for the Chicago metropolitan area, according to locally based Draper and Kramer Inc. "Buyers have been aggressive but not crazy," says William E. Montana, vice president of Draper and Kramer.

Cap rates are approximately 6.3%. Prices for the best properties average anywhere between $189,000 to $200,000 per unit. Meanwhile, rents have increased about 8% in the past eight months, while occupancies consistently remain at high levels, from 96% to 99%.

Montana says a few factors continue to fuel the strength of the multifamily market. Development has been constrained by zoning restrictions in the suburbs. In the city, a wave of condominium conversions has reduced the supply of apartments. Over the past 16 months, about 1,600 apartment units have been lost to conversions, according to Draper and Kramer.

About 1,400 new apartment units have just been completed or are planned for the downtown area. This includes One Superior Place (now open); Chestnut Tower, 121 W. Chestnut St.; and the Sterling, 333 N. LaSalle St.

Plans are moving ahead to build 764 apartments at 535 N. Dearborn St. Also, an office building at 343 S. Dearborn St. is being converted into 184 apartments.

Several major property sales have been announced recently. Chicago-based American Invesco Corp. will buy the New York, 3660 N. Lake Shore Drive, a 48-story, 593-unit tower for $100 million. Also, the 470-unit Ontario Place at 10 E. Ontario St. has been reported to be on the market for $80 million.

Chicago-based AMLI Residential Properties is just completing a project in west suburban St. Charles, AMLI at St. Charles. The property will have 400 luxury apartments and is slated for completion in June.

"There has been tremendous job growth in the western suburbs," says Stephen Ross, executive vice president at AMLI. "The suburban apartment markets are extremely strong and tight."

According to Draper and Kramer, the only submarket that remains soft is the southwest portion of DuPage County - the Naperville and Aurora areas - where a number of new units have come on line.

Also, a favorable interest rate environment has transformed many renters into home buyers because monthly payments on a purchase are sometimes lower than rents for high-quality units.

In Chicago, rents average $1,411 for Class-A units, a 4.9% increase over 1998. In Northwest Cook County, rents are $1,047 for Class-A units, compared with $1,016 in Lake County and $993 in DuPage County, according to Draper and Kramer.