Tech Industry Driving Chicago Real Estate Market

After years of struggles that followed the financial crash of 2008, Chicago’s economy is finally starting to get into gear. According to a report issued by the Illinois Department of Employment Security in September, the Illinois unemployment rate fell from 9.2 to 6.7 percent in just one year, marking the largest year-over-year decline since 1984. Preliminary data released by the IDES and the Bureau of Labor Statistics show there are also 40,600 more jobs this year than in 2013, most of them in leisure and hospitality, trade, transportation and utilities, and professional and business services.

 

In the context of this economic resurgence, Chicago’s real estate industry is also experiencing a revival, as office vacancy has now dropped to pre-recession levels, according to most recent data collected by Marcus and Millichap. The demand for office space is primarily driven by tech companies seeking downtown locations, mostly in the River North and River West submarkets. California-based Google, Inc. is one of many tech companies set to move to downtown Chicago. The company will occupy about 360,000 square feet in a 10-story building at 1000 W. Fulton Market by early 2016.

 

Job growth in the tech sector helped boost the office market this year, while strong rental demand in suburban office space brought rents higher. Marcus and Millichap reports that a total job growth of 1.6 percent is expected in 2014, with 70,000 new jobs added to the market. More than 2 million square feet of office space is currently underway in Chicago, with another 8 million square feet still in the planning stages. The largest project currently under development is the 1 million-square-foot River Point tower in the West Loop, a 52-story building slated for completion in 2017. According to Marcus and Millichap, developers are expected to add roughly 400,000 square feet of office space in 2014, after no new office space was completed during the last four quarters.

 

Chicago is also performing well when it comes to the retail industry, as the jump in employment and rising incomes are driving consumers to spend more. The retail market encountered a significant halt with the closing of 72 Dominick’s grocery stores in December 2013, but as of now all but one of the former stores have been purchased and are in the process of re-opening. Marcus and Millichap reports that more than half of the space vacated during 2013’s final quarter has been absorbed, as the market is attracting buyers from Canada, Europe and South America, and demand for retail properties surpasses the supply. The boost in employment is another factor in the rise of retail sales, and builders have nearly 500,000 square feet of space under construction to be delivered throughout 2015.

 

The drop in unemployment and the rising number of tech jobs in the region are also contributing to a growing demand in apartments in the downtown area. Roughly 6,000 rental units are currently underway, most of them located in the West Loop, the city’s tech core. Developers are expected to bring 3,100 multifamily units online in 2014, including 130 units of student housing, 80 senior apartments and 96 affordable rentals. The largest project finalized in the first quarter of 2014 was the 450-unit Hubbard Place apartment community at 360 W. Hubbard in the Streeterville/River North submarket.

Chicago: It's the hottest commercial property market since 2007

Sales of Chicago-area commercial properties are on pace for their best year since the crash amid an improving economy and low interest rates.

Investors acquired more than $9.15 billion in local apartments, hotels, retail, office and industrial properties through August, up 28 percent from the $7.14 billion spent through the first eight months of last year, according to New York-based Real Capital Analytics Inc.

Sales volume is on track for its highest annual level since its peak in 2007, when $22.5 billion in commercial property sold.

Investor demand for real estate continues to rise amid the slowly growing economy, which is pushing up occupancies and rents, and low interest rates, which has kept borrowing costs low and made it harder to find good returns on other investment types. At the same time, many landlords are capitalizing on soaring prices by putting their properties up for sale. And even higher prices in hot coastal markets are drawing more investors to Chicago.

“Nationally there's more being invested in commercial real estate, but I imagine Chicago is benefiting from the compression in yields and increase in prices in places like New York, San Francisco and Los Angeles,” said Ben Carlos Thypin, director of market analysis at Real Capital.

Nationally, prices for commercial real estate, except for office properties, have passed their 2007 peak, according to a report by Green Street Advisors Inc., a Newport, California-based research firm. A commercial-property price index calculated by Green Street has risen 7 percent in the past 12 months.

Sales of Chicago-area industrial properties have risen 55 percent, according to Real Capital, buoyed by renewed demand for “higher-grade” buildings by institutional investors, said Britt Casey, an executive director in the Rosemont office of real estate brokerage Cushman & Wakefield Inc. With 13.5 million square feet sold here in the first half of the year, Chicago was the most active industrial market in the nation, according to New York-based Cushman & Wakefield.

The recovering economy should help boost demand for commercial space, and support sales and prices in turn, Mr. Thypin said.

“Whether (the economy) continues to grow at the pace it seems to be growing this year remains to be seen, but the bottom falling out anytime soon is pretty unlikely,” he said.

Expecting a typical increase in activity in the fourth quarter, Mr. Thypin expects Chicago-area commercial property sales to exceed last year's total of nearly $14.6 billion.

Significant sales so far this year include the record $850 million paid for the office tower at 300 N. LaSalle St. and the $85 million deal for the 1.6-million-square-foot Solo Cup warehouse in the south suburbs. Other deals include the $60 million sale of the Golf Mill Shopping Center in Niles and the $132 million sale of a Gold Coast apartment building.

Suburban Chicago Hotel Market Begins to Stir

Hotel sales in the Chicago suburbs are expected to pick up this year after a long slog back from the downturn.

A smattering of trades in the past several months shows that investor interest has revived, and that’s expected to prompt more owners to list their properties. Buyers are attracted by relatively high capitalization rates on hotels that have potential for revenue growth, as room rates are beginning to rise.

Adam McGaughy, a managing director at Jones Lang LaSalle, anticipates “a continued acceleration of larger hotels being taken to market” in the suburbs this year. Including downtown Chicago, where several large properties are on the market, the brokerage projects as much as $1 billion of Chicago-area hotels will trade in 2014.

The markets surrounding the city were among the hardest hit by the crash, as an oversupply of new rooms combined with cutbacks in travel to send occupancy rates, and revenue, plunging. Numerous hotels were seized by lenders, and several were shuttered.

Since then, demand for rooms has slowly come back into balance with supply. For example, in the O’Hare Airport submarket, the occupancy rate reached 73.8% for the first 10 months of last year, up from 55% at the market bottom, in 2009, according to research firm STR. Meanwhile, there is little construction in the suburban pipeline.

“The perception of the market is that demand continues to be strong, there is stability and new supply is in check,” said Rick Rogovin, vice president of hotel investments at Dow Hotel Co.

Dow was on both sides of trades in the area last year. The Seattle firm was part of a joint venture that sold a 248-room Marriott Suites in Deerfield, Ill., for $30 million to Archon Group of Dallas. Jones Lang brokered the October sale. In June, Dow partnered with Carlyle Group of Washington to pay $37 million for the 369-room Hilton Hotel Orrington in Evanston, Ill. CBRE was the broker. Rogovin said the Orrington property offered both stable cashflow and opportunities for boosting revenue.

That combination is drawing attention from buyers that have raised substantial capital for hotel investment but don’t want to bid against the REITs and institutional buyers that tend to pursue properties in core markets, said McGaughy of Jones Lang. In the Chicago suburbs, buyers can get capitalization rates of 7-8% on hotels that are throwing off cash, yet still performing below peak, leaving room to grow revenues as fundamentals continue to improve.

And that, in turn, has fueled competition for assets there. “What we have found is that when [hotels] start to trade, we have been priced out,” said Chad Cooley, a managing partner at AWH Partners, an opportunistic hotel investment shop in New York. “People see it as a great opportunity to get in on a market that was hit particularly hard,” Cooley said.

Local pros expect more owners to list properties this year — including lenders. Jones Lang soon will begin marketing the 556-room InterContinental O’Hare Hotel in Rosemont, which opened in 2008 and was seized by its lender in 2011.

After a record $386.9 million of hotel sales in 2007, suburban Chicago saw only a handful of trades over the next five years. Activity began to stir last year, with three deals totaling $127 million, according to Real Estate Alert’s Deal Database, which tracks transactions of $25 million and up.

That came as hotel revenues rose in six of the seven submarkets surrounding the city. The growth ranged from 2.2% in the DuPage County submarket to 5.8% in Chicago South, with the airport submarket notching a 4.9% gain, according to STR. The exception was the Chicago Southwest submarket, which saw a slight decline in both occupancy and revenue.