January 2014

12th Annual Commercial Real Estate Forecast

We’re liveblogging from today’s 12th Annual REJournals Commercial Real Estate Forecast at the Sheraton Hotel in Chicago. Michael Flynn, Executive Vice President with NAI Hiffman’s office group is on today’s “The State of the Market” panel. Other panelists include:

Moderator: Gunnar Branson – President, NAREIM
Joe Cosenza – Vice Chairman, Inland Real Estate Acquisitions, Inc.
Todd Mintz – Executive Vice President/Co-Managing Director, DTZ
Drew Nieman – Executive Vice President, U.S. Equities Realty
Tim Hennelly – President, Great Lakes Region, Ryan Companies US, Inc.
Tony Smaniotto – Executive Vice President, Colliers International | Chicago

9:10 a.m. – Branson: What are the things that we think happened in 2013 that is counter to the conventional market, and what did we learn?

9:12 a.m. – Cosenza: The retail market saw more than 200,000 small businesses file for bankruptcy between 2009 and 2011, not to mention the hundreds of thousands of businesses that went out of business. Today, I’m not working with a single business that’s filing for bankruptcy or closing its doors. Occupancy is up, tenants are renewing their leases, things have really turned around.

9:16 a.m. – Cosenza: However, online retail sales are up 10.3% and several big chains are closing stores, including Dominick’s, Sears, Albertson’s, J.C. Penny, etc. – the market has changed.

9:18 a.m. – Hennelly: In the industrial market, the vacancy rate increased to a record high of 12%, which is a lot of space in a 1 billion SF market. Today, that vacancy rate has dropped to around 8.3% or 8.4%. One trend we’ve seen is the redevelopment of buildings, especially in Elk Grove Village and near the city, where buildings are being retrofitted with higher ceilings and larger truck courts to accommodate today’s market. We’re also seeing large companies consolidating from several buildings in the market into large, modern facilities. Clear heights continue to rise – for the past 10 or 15 years, the norm has been 30′ clear buildings, now 32′ clear is the standard. There are now buildings being built with 40′ celings.

9:23 a.m. – Flynn: The buildings that are better positioned and better differentiated from others are capturing the market demand and pushing the suburban office market vacancy rate below 20% for the first time in more than five years. The buildings that have the appropriate amenities, infrastructure, and vision going forward will continue to be well-positioned.

9:26 a.m. – Nieman: In the city we have had reductions in vacancy and contiguous blocks of space – which are both indicators we all look at. 2013 was a good year for companies migrating from the suburbs into the city with Mayor Emanuel right behind that push. One trend that has really taken hold this year is the “densification of office space”. Two new construction projects were announced during 2013, a good sign for the future of the downtown office market. Among the 15 million SF of office buildings constructed downtown since 2000, the vacancy rate among those buildings is around 4%, compared to 12% or higher in the overall market, suggesting that there is clearly demand for new construction.

9:32 a.m. – Mintz: On the tenant side, users are trying to be more conscious of how they are using their space, more aware of environmental factors, and more careful with how they are laying out their space. As a result, many tenants are taking their time making decisions. A lot of the businesses that survived the downturn have recovered, but are being more thoughtful today about their business decisions and how they think of their office space.

9:37 a.m. – Smaniotto: On the surface, the investment market seems to be doing great – and indeed it has been strong. Many investors are still concerned with the fact that Chicago lags the rest of the country in jobs, we’re dealing with a terrible pension crisis, and the politics in Chicago are questionable. However, the city that works keeps on chugging along. Last year we did about $3.7 billion in transactions, compared to $2.6 billion and $2.8 billion over the previous two years. The bulk of interest downtown last year came from investors looking for core product, but now we’re seeing investors willing to take higher risks and potentially realize higher yields moving into the market. In the suburbs, a few buildings have actually sold twice during this cycle. Central Park of Lisle sold first for $88 million and recently sold for $125 million.

9:44 a.m. – Branson: We’re seeing several investors coming in from Canada and Asia – investors looking for more value-add properties versus the typical core product.

9:47 a.m. – Hennelly; Target is looking at their stores and their delivery infrastructure to try to provide same-day delivery similar to Amazon. Everyone needs to pay attention to what is happening with Amazon – aside from the drone PR stunt around the holidays, Amazon is affecting every property type in the market from industrial to retail to multifamily.

9:50 a.m. – Mintz: For office, the trends going forward are going to revolve around density and space usage. Locally, companies will continue to want to move downtown or to at least have a downtown office as there is a draw to being in the city and increasing density. I do believe that there will be a cycle where things become too dense and companies will spread out a bit, but for now the trend is to increase density. We will also see a lot of renovation of buildings downtown in 2014 and 2015 similar to what is going on at the Wrigley Building. A few buildings, like Prudential Plaza and Citadel, will be going through the renovation process over the coming year.

9:58 a.m. – Flynn: The opportunity in the suburban market that we saw over the past three or four years is that the O’Hare market came back first. Easy access to transportation and a Chicago address pushed demand to those buildings before the rest of the market started to recover. The key to the suburban marketplace involves the owners – if they can differentiate their building and provide the parking, access to transportation, or amenities tenants are looking for with their decisions to increase density, the building will still do well in today’s market.

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