“Live, work, play” has been downtown Chicago's catchphrase since 2000. In recent years it's been amplified by a surge in new high-rise condo projects, office skyscrapers and a new nearly half-billion dollar lakefront park.
Sounds exciting, but many Chicagoans anxiously await job growth to coincide with the downtown build-out where more than 600,000 people work.
From January to October 2004, about 1,000 jobs were added to metropolitan Chicago's workforce of 4.15 million. While not spectacular, it beats the 150,400 jobs that were lost between 2001 and 2003. Nationally, the job picture is much rosier with 12 straight quarters of gains, resulting in roughly 2.4 million new jobs added by the end of 2004. “We are very much tied to the manufacturing sector,” says Anne Edmunds of Manpower Inc., “which showed lower growth and affects many other industries.”
Loss of corporate headquarters also hampered employment gains. In 2004, New York-based J.P. Morgan Chase announced its $58 million acquisition of Bank One Corp. Two years earlier, Chicago lost the corporate headquarters of accounting firm Arthur Anderson, which disappeared following the Enron scandal. And another major hit came from heavy layoffs at Motorola, Tellabs, SBC Communications, United Airlines and many other businesses.
Despite slow job growth, residential construction in downtown, which began in 1997, is booming. New for-sale residential deliveries surpassed 1,000 in 1998, averaged 3,000 annually the next three years and peaked in 2003 with 4,185 units.
So, what's driving the demand for residential space? Buyers include young professionals and aging suburban empty nesters, as well as speculators. Low interest rates and a weak stock market also keep money flowing into the condo market, and the rapid construction pace is continuing with 4,500 new condos being added in 2005.
The building boom downtown isn't just limited to residential, either. Pre-leasing commitments from law firms and financial companies led to the construction of more than 3 million sq. ft. of office space in 2004.
Just north of Sears Tower, developers Pritzker/Higgins Development late last year opened their gently curving 47-story Hyatt Center, anchored by law firm Mayer, Brown, Rowe & Maw. Nearby, The John Buck Co.'s $300 million, 51-story 111 South Wacker will be the new home of Deloitte & Touche and law firm Lord Bissell & Brook following its opening this summer. On the residential front, Donald Trump's $650 million, 90-story hotel and condominium tower will punctuate downtown's northern skyline by 2008. In the meantime, local developers such as Magellan Development Group and Mesa Development will deliver condo towers on downtown's eastern edge.
The 117.3 million sq. ft. downtown office market is full of contradictions. In the midst of rising vacancy rates, there's a building boom. Direct vacancy rose to 14.3% from 13% one year ago, according to CB Richard Ellis (CBRE). With 3.7 million sq. ft. of office space under construction, vacancy rates will likely climb even higher. However, tenants and investors will both pay a premium for well-located and desirable office space.
On prestigious South Wacker Drive, the 1.5 million sq. ft. Hyatt Center and the 1 million sq. ft. 111 South Wacker are opening with nearly 75% pre-leasing. “It's a tenant testimonial to the location and the quality of development,” says Jeff Samaras, executive director of Cushman & Wakefield. He notes that the West Loop consistently posts vacancy rates 2% lower and rent rates about $2 per sq. ft. higher than the rest of the Loop, thanks to its corporate address and proximity to commuter train stations.
New construction's higher technological capacity and more flexible floor plates also attract law firms and financial companies out of the Central and East Loop. Landlords in these existing buildings are scrambling to fill the 2 million sq. ft. of space those tenants will leave.
There's also enormous investor demand for downtown Class-A office buildings with creditworthy tenants on long lease terms, according to Bruce Miller, managing director of Jones Lang LaSalle. For example, three West Loop buildings sold in the third quarter of 2004: 191 N. Wacker Drive for $222 million; 333 West Wacker Drive for $208 million; and 222 S. Riverside Plaza for $192 million.
Typically, office sales downtown average $1.8 billion annually, but 2004's sales volume is expected to hit $2.9 billion, partly because of the $835 million sale of the Sears Tower. Miller forecasts that inexpensive debt combined with the economic recovery will keep the office investment market hopping in 2005. Downtown's office growth may be overshadowed, however, by the emerging suburban recovery.
The suburban office market continued its steady climb out of the depths of the early 2000s when the recession, the telecom tailspin, surging sublease space, new inventory and no demand pushed vacancy rates up to 25%.
In 2004, demand from small- to mid-sized firms and nearly no development of multi-tenant buildings helped lower Chicago's direct office vacancy rate to 18.3% in the third quarter from 19.4% one year ago. Nationally, the suburban office vacancy rate also improved to 17.4%, according to CBRE. Absorption in the suburbs was a positive 1.9 million sq. ft. for the first three quarters of 2004 and a negative 831,248 sq. ft. in downtown, according to Trammel Crow.
Thomas D'Arcy, vice president of the Midwest region for Hines, says he's averaging three or four showings in the suburbs for every one downtown. He predicts a suburban speculative office building will break ground in 2005 or 2006 because of the limited options for 100,000 sq. ft. blocks of contiguous Class-A space.
Positioning itself for the rebound, owner/developer GVA Williams bought an empty 344,000 sq. ft. office building in the East-West Corridor. GVA Williams also purchased a building soon to be vacated by Liberty Mutual. The latter is “the only building in Oak Brook that could provide 170,000 sq. ft. to one tenant,” says Rand Diamond, managing principal at GVA Williams' Chicago office. With the East-West Corridor containing the highest concentration of Fortune 500 companies in the Chicago area, Diamond says it will be one of the first areas to benefit from job growth.
Manpower's employment outlook survey also shows the scales tipping in the suburbs' favor. “The suburbs, especially the northern suburbs, are seeing faster growth than downtown,” Edmunds says.
Industrial flexes muscle
Chicago's more than 1 billion sq. ft. industrial market is slowly turning a corner following the recession of 2001. Strong leasing demand has kept absorption rates steadily rising the past three years even while Chicago's inventory base has been growing between 12 and 13 million sq. ft. annually since 2001.
The industrial vacancy rate in the third quarter registered 9.41%, which was unchanged from a year ago. The market benefitted by 8.3 million sq. ft. of absorption. Speculative construction for 2004 was 8.8 million sq. ft., easily eclipsing 5.2 million sq. ft. recorded in 2003, according to Rosemont, Ill.-based Colliers Bennett & Kahnweiler.
Several 1 million sq. ft. distribution centers also are going up in areas far-flung from downtown Chicago, including developments for Target and DSC Logistics.
“The Chicago marketplace is getting bigger,” says Ed Lowenbaum, senior vice president of Trammel Crow, “especially with the addition of Global III,” Union Pacific's $181 million intermodal yard in Rochelle, 95 miles west of Chicago.
About 20 miles east of this cargo hub, Target Corp. is building a whopping 1.5 million sq. ft. distribution center in the Park 88 complex in DeKalb. And in Elwood, 35 miles southwest of Chicago, Oak Brook, Ill.-based CenterPoint completed a $30 million, 1 million sq. ft. distribution center for DSC Logistics at its intermodal distribution center. According to Lowenbaum, modern intermodal yards in outlying areas offer regional distribution companies quicker access in and out of the area rather than Chicago's bottlenecked rail and road system.
Closer to Chicago, speculative and build-to-suit developments also are dotting the landscape. Bordering Chicago's Southwest Side, CenterPoint plans to build a 437,800 sq. ft. speculative bulk warehouse facility. Five build-to-suit projects are under construction in Lake County, boosting its industrial base by 805,800 sq. ft.
O'Hare International Airport's expansion is also driving demand for air freight facilities, says John Sharpe, president of Lee & Associates. During the third quarter, 1.8 million sq. ft. was leased around O'Hare, with five firms signing leases for 787,900 sq. ft.
Investors are chasing industrial, similar to other property types. “We're seeing the lowest cap rates (6% to 6.5%) in a long time. If you have a leased property, there's no better time to sell it than now,” says Tony Pricco, vice president of development for Rosemont, Ill.-based McShane Construction.
CenterPoint acquired nearly all of Prime Group Realty Trust's industrial holdings throughout Chicagoland — — 30 buildings totaling 3.8 million sq. ft. for $125 million. CenterPoint also is selling a $134 million, 12-building industrial portfolio to a private investor. “Multi-building portfolio sales are very hot,” says Brian Townsend, senior vice president of investments at CenterPoint.
Retail posts strong showing
While retail vacancy hovered around 10% for most of 2001 and 2002, fundamentals have since improved. CBRE reports a vacancy rate of 7.75% among Chicago's 110.3 million sq. ft. of retail centers as of third-quarter 2004. Nine centers totaling 1.6 million sq. ft. came on line during the third quarter throughout Chicago.
National retailers continue to enter Chicago, as evidenced by the 22 centers totaling more than 2.9 million sq. ft. under construction late last year. More good: average lease rates are up to $20.38 per sq. ft. from the high teens of recent years.
In the city of Chicago, the number ofslightly decreased in 2004, but rental rates for quality spaces increased 10% to 15%, reports Greg Kirsch, principal of Chicago-based Baum Realty. He notes that prime corner retail spots leased for about $25 per sq. ft. one year ago, and now they're up to the mid-$30s.
Aggressive expansions by financial institutions in 2003 drove up rental rates, and some city and suburban public officials are seeking to curb further expansion as Chicago contains the highest number of bank branches per capita in the country. “Bank One is clustering branches in close proximity,” Kirsch says. “It almost looks as though they're trying to get ahead of the new ordinance to exclude the competition.”
The metro area's supermarket-based development has spread beyond the traditional dominance of Jewel-Osco and Dominick's. After Safeway bought Dominick's in 1998, the chain slowed its building of new stores and closed others. The bankruptcy of Eagle Food Centers in 2003 also presented opportunities for independent players to gain market share, according to George Redfearn, vice president of development at Tucker Development Corp. in Highland Park.
Big-box retail hit the urban core in 2004 with the opening of Target in the city's trendy South Loop. In the densely populated area just north of downtown, a Best Buy, Kohl's and Circuit City were also added. “We're seeing a nationwide trend of big boxes pressing forward into urban markets,” says Bruce Kaplan, president of Northern Realty. “They're finding ways to operate on multiple levels with structured parking.”
Steady, if unspectacular growth is the retail forecast of Elliott Quigley, senior vice president of Cleveland-based Key Bank. “Retail will catch up with the housing growth in the suburbs and condo infill sites.”
Hotels landing by airports
The Chicago lodging market, which bottomed out during the middle of 2002, has maintained a comfortable 70% occupancy level over the past two years. During 2004, the room rate for Chicago's MSA was down nearly 1% and occupancy was up 2.1%, according to Smith Travel Research. However, Chicago is the only market where rates were down, reports Bobby Bowers, senior vice president of the Hendersonville, Tenn.-based lodging information provider.
“Hotels have not performed as well as other cities,” Bowers says. “A lot of conventions have not come to Chicago because it's too expensive and other cities like Las Vegas are more competitive now.”
Nonetheless, increased business travel and large meetings have helped the downtown and airport markets. Three new hotels (821 rooms) will be added near O'Hare in 2005. In total, metro Chicago is expected to add 2,567 rooms across 12 hotels to meet expected needs.
According to Mark Elbe, vice president of PKF Consulting, “Overall raw demand is picking up in Chicago's hotel market and we expect it to reach the high levels attained in 2000 as the economy picks up.”
Paula Widholm is a Chicago-based writer.
Chicago - BY THE NUMBERS
POPULATION OF METRO AREA:
Source: World Business Chicago
Chicago Public Schools
Source: Crain's Chicago Business
METRO AREA STATS
16.6% vacancy, 3Q 2004
16.7% vacancy, 3Q 2003
Rent per sq. ft.: $23.68, 3Q 2004
Source: CoStar Group
92.8% occupancy, 3Q 2004
92.7% occupancy, 3Q 2003
Rent per sq. ft.: $2.16
Source: Marcus & Millichap
7.75% vacancy, 3Q 2004
9.2% vacancy, 3Q 2003
Rent per sq. ft.: $20.38
Source: CB Richard Ellis
9.41% vacancy, 3Q 2004
9.35% vacancy, 3Q 2003
Rent per sq. ft.: $4.67 net
Source: Colliers Bennett Kahnweiler
69.4% occupancy, Oct. 31,2004
67.9% occupancy, Oct. 31,2003
Average daily rate: $113.34
Source: Smith Travel Research
MAJOR PROJECTS UNDER CONSTRUCTION:
111 South Wacker, a 51-story,1 million sq. ft. office building in downtown Chicago
Cost: $300 million
Developer: The John Buck Co.
Completion: Summer 2005
One South Dearborn, a 40-story, 800,000 sq. ft. office building in downtown Chicago
Cost: $225 million
Completion: November 2005
Target Regional Distribution Center, a 1.5 million sq. ft. industrial facility in DeKalb
Cost: $110 million
Developer: Walsh Construction Co.
Completion: February 2006