When budding entrepreneur Bill Rancic won the widely popular contest on “The Apprentice” reality TV show to land a dream job working for Donald Trump, the Donald gave him two choices: Rancic could either manage the development of a new golf course project in sunny Southern California or oversee the construction of the 90-story high-rise Trump International Hotel & Tower. The latter is a $650 million building encompassing 2.4 million sq. ft. on the near north side of Chicago. Rancic didn't hesitate: the Windy City was where he wanted to be.

Rancic will face plenty of challenges in the Midwest's largest marketplace. As with most of the rest of the nation, vacancies in practically all of Chicago's real estate asset categories have been on the rise since the recession and 9/11. It may take years to absorb some of the excess capacity in certain submarkets.

But even so, new investors in the marketplace like Trump are still finding plenty of deal-making opportunities. With a metro population of roughly 8 million, the third largest in the U.S., and one of the most diverse economies of any large city, Chicago is a deep, multi-faceted real estate market that never slumbers for long.

Indeed, a flurry of activity is occurring on multiple fronts. The state of Illinois has just approved a new gambling casino for the suburb of Rosemont, adjacent to O'Hare International Airport, to be operated by Mississippi-based Capri Casinos Inc. Additional casinos are being proposed for the city of Chicago and several south suburbs. The hospitality industry is watching closely.

Local hospitals have mapped out ambitious plans for expansion, with institutions in DeKalb, Aurora and Naperville, among others, proposing new facilities that could each cost $300 million and more. The Chicago Fire soccer team is building a $70 million stadium in suburban Bridgeview. Waubonsee Community College is buying up whole blocks in blighted downtown Aurora with plans to build a new $20 million campus.

Much of the plans for new construction are occurring against a backdrop of frenzied growth. Housing starts in the suburbs grew to a record 32,000 in 2003, up 6% over the 2002 total.

Once-rural Will County, an enclave 30 miles southwest of Chicago comprised of mostly farmers until a few years ago, experienced a jump in population to more than 500,000 amid predictions it will keep growing past 1.1 million by 2030. Employers are flocking to the area.

New roads are being planned to accommodate this growth. Southwest of Chicago, politicians are pushing for the extension of Interstate 355 from its current terminus at I-55 another 12 miles south to Interstate 80. That would almost certainly create an important new corridor of industrial development at a time when the local economy is showing marked improvement. Midwest employment in the critical manufacturing sector has been moving up steadily since February after 42 months of decline, according to the U.S. Labor Department, with 21,000 jobs created region-wide in April alone, the biggest monthly gain in four years.

Office Market Lying in Wait

In the aftermath of 9/11, it was widely feared that marquee high-rise officer towers would see an outflow of tenants. It never happened. At the John Hancock Center on Michigan Avenue, which has 800,000 sq. ft. of office space, vacancies are running at about 15%, just above the citywide average of 13.4%.

“There was a pretty big emotional response from some tenants after 9/11, but in retrospect it seems that response was overblown,” says Daniel Nikitas, senior vice president of leasing at Shorenstein Realty Services LP in Chicago, owner of the John Hancock Center, as well as the nearby Prudential Plaza and other high-rises. “The owners of the big buildings in town have put tough security measures in place and peoples' worries have been allayed.”

Investors' worries have also been relieved. Owner MetLife Inc. is selling the 110-story Sears Tower — the nation's tallest building — to a New York investment partnership for an undisclosed price. The prospects for the Sears Tower have been looking up since it successfully renegotiated leases with several major tenants. Overall vacancy is just 11%, the owner says.

Nevertheless, lease pricing has been in free fall. Contracts up for renewal are being renegotiated at rates 20% and 30% lower than the late-1990s peak, with plenty of free rent and other extras thrown in. The city's biggest banking institution, Bank One Corp., has a pending merger with J.P. Morgan Chase & Co. and is preparing to put more than 800,000 sq. ft. of excess space it owns in buildings downtown back on the market. Another block of 600,000 sq. ft. downtown remains vacant from the Arthur Andersen & Co. accounting blowout two years ago.

“The Bank One vacancy is like throwing another log on the fire,” says Michael Bishop, a senior vice president with Equis Corp. “Tenants have a lot of options for space right now, and that's keeping lease rates depressed.”

Law firms are expanding, and many have been drawn to new construction. When Hines Interests LP delivered its 191 N. Wacker building of 735,000 sq. ft. in December 2002, it was just 68% leased. It's now 88% filled. Another Hines building at 1 South Dearborn of 820,000 sq. ft. will be completed in 2005, with law firm Sidley Austin Brown & Wood signed on for 500,000 sq. ft.

“The new buildings like ours are getting tenants, but unfortunately it's a game of musical chairs,” says Thomas D'Arcy, vice president of marketing at Hines. “They're leaving behind vacant space in older buildings that isn't easy to fill. We're not experiencing much positive net absorption.”

In pockets of the suburbs, the situation is far worse. The suburban vacancy rate is 19.3%, with 73,000 sq. ft. of negative net absorption in the latest quarter. The once-thriving East-West Tollway Corridor, home to such fallen telecom giants as Tellabs and Lucent Technologies, has a 20.1% vacancy rate that rises above 26% when available sublease space is included.

Suburban leasing deals are typically deeply discounted. One bright spot has been around O'Hare International Airport. MB Financial, a Chicago bank, recently paid $19.3 million for the 275,000 sq. ft. former headquarters in Rosemont of Comdisco Inc., a specialist in computer leasing that disappeared into bankruptcy two years ago. “It would have cost us over $30 million to build the same structure new today. We got a good deal,” says Jill York, CFO of MB Financial.

Class-A rates in the suburbs have fallen so far that Steven Kline, senior vice president of the office advisory group for Colliers Bennett & Kahnweiler in Rosemont, foresees Class-B building owners getting squeezed by tenants seeking to trade up. Indeed, according to Jones Lang LaSalle, the western segment of the Interstate 88 corridor 25 miles and more from Chicago has seen Class-A office rates fall from above $18 per sq. ft. in 2000 to close to $17 currently, while Class-B rates have been largely unchanged at about $15 in the same span of time.

No Pause for Multifamily

In its original plan, Trump Tower was going to include a mix of offices and condominiums. Then the office market tanked and Trump decided to ditch the offices in favor of more condo units, with prices averaging $750 per sq. ft. — higher than virtually anything Chicago has seen before.

The developer has sold nearly 70% of the units, which sell for up to $2 million and higher, and is reportedly close to clinching a deal on a $750 million construction loan from an unidentified banking source so that groundbreaking can proceed within a year.

More than 450 residential units, or roughly two-thirds of the total, have been sold with the start of construction still more than a year away. Rival developers once were skeptical that the Trump project would ever get launched, but most now profess admiration for the rapid lease-up.

“To make this work Trump had to deliver a sterling product. Trump has proven that he can do that,” says Bishop of Equis Corp.

Indeed, the condo market continues to attract new investment, sometimes on a grand scale. Magellan Development Group Ltd. is partnering on Lakeshore East. Located on 26 acres of former golf course land next to Grant Park and at 4,950 units is reputed to be the largest urban development in the nation. Its build-out value is estimated in excess of $2.5 billion.

A first-phase rental building called the Shoreham, an apartment tower of 550 units, is under construction with rents averaging $2.21 per sq. ft. A condo tower of 209 units is also under construction, with prices of $370 per sq. ft.

Marcus & Millichap forecasts that rental vacancies will decline from the 7.3% level of 2003 to 7% this year as asking rents rise again after falling slightly last year. The firming market can be partly attributed to declining construction — just 1,300 rental units are expected to deliver this year, down from 2,400 in 2003, according to Marcus & Millichap.

“The rental market in Chicago has held up better than other cities,” says Joel Carlins, president of Magellan. “That's partly a reflection of the fact that the center city hasn't lost many jobs since the recession started.”

There is more worry about a glut of condos. Golub & Co. has erected condo towers around the city for more than three decades but recently has been investing in suburbs such as Arlington Heights. Michael Newman, president and CEO, says the firm has nothing planned in Chicago. “Clearly there is a concern that the condo market might be getting overbuilt,” he says.

Will County Leads Industrial Market

Manufacturing continues to struggle in some places, as recent headlines attest: in an ongoing consolidation of production facilities in other places, Caterpillar is closing a center in Joliet with 200 workers and Kraft is shutting down a bakery in Niles where 400 were employed.

Chicago didn't acquire its broad shoulders merely for loading packages onto truck beds, but increasingly that's the reality of its distribution-centered industrial sector. The current metro-wide vacancy rate of 9.2% is high by historical standards.

Nevertheless, plenty of investment continues on the industrial front. Industrial Developments International (IDI) in Atlanta is acquiring an 80-acre parcel in Bolingbrook in Will County for roughly $150,000 an acre that will support a 1.5 million sq. ft. industrial park. “Will County has cheaper taxes than Chicago and the other collar counties,” says Tom George, a senior vice president with IDI. “And Will is also close to Interstate 80, which is where big tenants distributing around the Midwest want to be now.”

There are new railroad intermodal facilities near Joliet and in far west Rochelle, further driving tenants into the suburbs. But James Swartchild Jr., executive vice president of Paine/Wetzel ONCOR International, doesn't think Chicago is giving up on industrial.

Tax breaks reducing property assessments by 50% for the first decade after a major urban rehab project are being offered to many companies. “Economic forces are driving industrial development to the suburbs, but there's still steady activity in the city, too,” Swartchild reports.

Some developers are straddling both markets. ML Realty Partners LLC recently acquired a 380,000 sq. ft. factory on Chicago's northwest side formerly occupied by Helene Curtis Industries. The cost, says Peter Harmon, an ML principal, was around $28 per sq. ft. “We don't have a tenant yet, though we're getting good interest in the building. The market is slow right now,” Harmon admits.

Retail: Here Comes Wal-Mart

A bevy of retail chains, ranging from the office-supply chain Staples to Dick's Sporting Goods and off-price apparel discounter Ross Stores, are seeking to enter the metro market. While Wal-Mart has been in the suburbs for over a decade, the behemoth discounter just now is proposing its first stores in the city — and creating a storm of controversy in the process.

Union members have objected to non-union Wal-Mart's incursion and talked aldermen into holding up site approvals. Eventually, however, the big retailer is likely to get what it wants. Meanwhile, the company is introducing its first Wal-Mart Supercenter to the metro market with the opening of a 200,000 sq. ft. store by fall in north suburban Antioch. Rival Target is rolling out new superstores, too.

Outlet malls have struggled in recent years, but Roseland, N.J.-based Chelsea Property Group was slated to open its Chicago Premium Outlets, spread over 438,000 sq. ft., in suburban Aurora in late May. Cincinnati-based Jeffrey R. Anderson Real Estate Inc., on the heels of its recent success with the Geneva Commons lifestyle center, expects to open a similar retail center in northwest suburban Algonquin, spanning 600,000 sq. ft. and costing in excess of $150 million, by fall.

One of the busiest retail developers in the marketplace has been Minneapolis-based Ryan Cos., which is erecting shopping centers spanning roughly 200,000 to 500,000 sq. ft. for big-box merchants in Romeoville, Tinley Park and New Lenox. “We do retail projects in Minneapolis, Phoenix and San Diego, but we're more concentrated in Chicago than any place now because it's such a dynamic market,” says Randy Danielson, director of retail development for Ryan.

And some not-so-good things have been happening. Kmart has closed dozens of stores, while Dominick's Finer Foods, suffering under the weight of a unionized workforce that has left it hard-pressed to compete against non-union rivals, announced it was shutting at least 12 supermarkets. Colorado-based Sports Authority Inc. closed four stores. The Fannie May candy chain went into bankruptcy, forcing dozens of local shops to close.

But the slack has been picked up by expanding retailers like Trader Joe's specialty food chain, which announced that it intended to build five more stores around Chicago in the next 18 months. Kroger also is expanding, putting up a half-dozen Food 4 Less stores in the city and suburbs in the past year in ethnic neighborhoods.

Hotels Stirring Again

As occupancy rates begin to recover from the post-9/11 downturn, hotel developers are springing into action. Most new development in the marketplace since the late 1990s has involved smaller-scale, limited-service flags such as Comfort Inn. Now, big full-service hotels are planned in the suburbs of Des Plaines, Wheeling and Gurnee.

The trigger has been improving occupancies: from a low of about 50% in the months after 9/11, they've rebounded above 58%. In the past year, occupancies are up nearly 6%. Revenue per available room (RevPAR) — a common yardstick in the industry — is up a more modest 3% in the past year. However, Chicago still lags healthier markets such as Atlanta, where RevPAR is up 15% in the past year and occupancies are running 62%, according to Smith Travel Research.

In the suburbs, it may come down to dueling convention centers. A $120 million convention center and hotel is proposed adjacent to the Yorktown Shopping Center in Lombard by local development firm Harp Mid-America.

In nearby Naperville, city officials are soliciting developers for a similar complex. The city of Schaumburg is enlisting support for a 400,000 sq. ft. convention center next to a 500-room hotel accompanied by a 2,400-seat theater. The cost is pegged at a daunting $280 million. Critics doubt there is enough demand for meeting space to fill all of the planned new capacity, though that hasn't slowed developers much so far.

David Bossy, president of Mid-America Investment & Development Co. in Oakbrook Terrace, is a partner in the Lombard and Wheeling hotels, the latter expected to be a 400-room Westin. He's better known as a shopping center developer, but lately Bossy has switched much of his attention to the hospitality sector.

“Very few major four-star-quality hotels have been built around Chicago's suburbs for years,” Bossy says. “This has been a sleepy business that could use some new investment.”

H. Lee Murphy is a Chicago-based writer.

CHICAGO - BY THE NUMBERS

POPULATION OF 6-COUNTY METRO AREA: 8.09 million

Source: 2000 census

UNEMPLOYMENT RATE: 6.7%

LARGEST EMPLOYERS:

  1. U.S. government
    88,000 employees

  2. Chicago Public Schools
    46,184 employees

  3. City of Chicago
    39,275 employees



Source: Crain's Chicago Business

METRO AREA STATS

Office:

20.4% vacancy, 1Q 2004
20.3% vacancy, 1Q 2003
Rent per sq. ft.: $23.17 per sq. ft., 1Q 2004

Source: Studley Inc.

Multifamily:

7.3% vacancy, 4Q 2003
6.7% vacancy, 4Q 2002
Rent per unit: $950, 4Q 2003

Source: Marcus & Millichap

Retail:

7.8% vacancy, 1Q 2004
10.2% vacancy, 1Q 2003
Rent per sq. ft.: $20.08, 1Q 2004

Source: CB Richard Ellis

Industrial:

9.2% vacancy, 1Q 2004
9.5% vacancy, 1Q 2003
Rent per sq. ft.: $4.21, 1Q 2004

Source: CB Richard Ellis

Hotel:

58.4% occupancy, YTD as of March 2004
55.2% occupancy, YTD as of March 2003

Source: Smith Travel Research

MAJOR PROJECTS UNDER CONSTRUCTION:

Lakeshore East, a multi-phase project of 4,950 residential units, 2.4 million sq. ft. of offices, 1,500 hotel rooms and 250,000 sq. ft. of retail space

Cost: $2.5 billion

Owner: Magellan Development Group Ltd. of Chicago and partners

Completion: 2015

River East Center, a multi-phase retail and condo complex

Cost: $1.5 billion

Owner: MCL Cos.

Completion: 2010

111 S. Wacker, a 1 million sq. ft. office tower spanning 50 stories in downtown Chicago.

Cost: More than $200 million

Owner: John Buck Co.

Completion: Summer 2005

Hyatt Center, a 47-story, 1.5 million sq. ft. office tower

Cost: Estimated $300 million

Owner: Higgins Development Partners

Completion: Early 2005