Event: The Future of the West Suburbs and Beyond

On Tuesday, June 30th, Bisnow hosted a panel to discuss how the western suburban market is doing and competing for deals in today’s real estate cycle. Steve Horvath with Conlon Commercial served as moderator to the following panelists: 

• Jim Adler, NAI Hiffman 
• Phil Sheridan, Hamilton Partners 
• Michael Klein, GlenStar Properties 
• Rich Tucker, Tucker Development 
• Brian Gay, Choose DuPage 

Opportunities
Adler sees opportunity to add value and rent growth and notes the word “crisis” is no longer part of our vocabulary. Sheridan observes vacancy rates declining, particularly on quality, well-located assets. Gay points out that headlines are focused on the CBD but the suburbs have a great story too: highly educated workforce and unemployment in the 4% range. Klein sees leasing velocity picking up in the suburban market. Klein predicts new office development in the suburbs will be driven by specific tenant demand. Adler points out that there is only one 50,000 SF option in Oak Brook today. Tucker states the western suburbs offer retail and mixed use projects great demographics and densities.  

Market Dynamics 
Adler notes out the suburban office market had 7 million square feet of positive absorption over the past five years. The story for Class “A” properties is even better with 90% occupancy. Sheridan states Hamilton Partners had a good leasing year in 2014, a slow first quarter with a noticeable pick up second quarter. He observed that population growth is fueling other markets such as Nashville and Austin and he would like to see population growth here. The statistics between the CBD and the suburbs is skewed as some obsolete office buildings in the CBD have been removed from the office inventory, converted for alternative uses, according to Klein. That trend is not occurring in the suburban market. He sees the Class “A” markets are pretty similar between the CBD and the suburbs. Gay notes site selection RFPs continue to flow, albeit slightly slower than last year. Sheridan states that Hamilton Partner’s Arboretum Lakes in Lisle, the current rents are virtually 30 years old, $12.75 PSF in 1986 compared to $12.50 PSF today. Adler notes that well located, Class “A” assets are increasing asking rental rates.  

User Trends 
Gay sees users coming from both in-state and out-of-state locations such as the Ohio and Tennessee Valleys and Texas. Tech companies, manufacturers and traditional office users want to be close to transportation infrastructure that Chicago provides via interstate, rail and air. DuPage County’s Rev3 Innovation Center is a DuPage County initiative underway to spur growth, with 24 companies taking advantage of this opportunity over the past two years. Klein notes that during the recession, financial companies and law firms significantly over downsized, contracting space yet did not change headcount. The benching concept did not work for these types of users and they are now expanding. Klein also notes tenants in the field of technology, advertising and marketing are in a growth mode. Sheridan also notes growth in the engineering and construction sectors. 

Investment Activity 
From an investment perspective, buyers previously focused on the city will turn their attention to the suburbs. Sheridan notes that currently there is a 150-250 basis spread between the city and the suburbs. Klein believes that core money will be investing in the suburban market in the next 12-24 months. As the market continues to improve, he expects the spread to decrease. Klein’s acquisition of 2400 Cabot in Lisle was initially targeting 100,000 SF tenants. After seeing 50,000-80,000 SF tenants looking in the market, they re-evaluated their re-tenanting of the building. Klein recommends asking, “how the market is changing?” and “how can we take advantage of it?” Gay anticipates the Elgin/O’Hare/I-390 Expressway expansion project will open up 127 square miles of opportunities along its path. 

Final thoughts 
When comparing the current real estate cycle to the timeline of a baseball game, the optimists believe we are in the 5th inning and the pessimists feel we are in the top of the 7th inning. A special shout out goes to our very own Michael Flynn, acknowledged as Jim Adler’s mentor, playing an instrumental role when Jim started out in the business. Do you have an upcoming closing that needs a celebration? The consensus amongst the panelists is the patio at Gibson’s is the place to go so close those deals and make your reservations now. 

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