Conditions of the Chicago Real Estate Market Downtown Office Market | 2015 March 12, 2015 David J. Gelfand Executive Vice President Colliers International [email protected] presented by:
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Conditions of the Chicago Real Estate Market Downtown Office Market | 2015March 12, 2015
David J. Gelfand Executive Vice President
Colliers International
presented by:
Economic Trends
2
> Improving Chicago Area Unemployment Numbers• 12.2% in December 2011
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
Source: Costar; Colliers International Research
Sq
uare
Fo
ota
ge
1,745,968
782,400
1,504,364
1,892,460 1,897,981
479,000
0
665,000
3,652,913
933,710
0 0 0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
> Migration of Large Tenants from suburban office market• 27 companies have relocated headquarters to downtown Chicago since 2011
> Growing Tech sector transforming neighborhoods and buildings
> No major new
construction deliveries
between 2011 - 2014
> Favorable lending environment
9.6% in January 2014 6.2% in December 2014
Workplace Trends
3
> Footprint Compression
• 15% - 40% average Space Reduction while simultaneously increasing head count
> Proliferation Co-working/Collaborative Spaces/ Incubators/Accelerators
• Increased productivity
• Knowledge-sharing
• Message-oriented design/cultural branding
• Technology resulting in flexibility and mobility
• Work anytime and anywhere
• Cloud – Wi-Fi – Mobile
• Workplace enhancement via social media
• The “Googlization” of Chicago
> Additional Trends
Tenant Amenity Trends
4
• Upgraded Conference Centers
• Fitness Centers
• Tenant Lounges
• Bike Rooms
• Co-working Spaces
• Wi-Fi
• Roof Decks
• Concierge
• Indoor Driving Range
Chicago Office Investment Market Highlights
5
> $4.3 billion of Chicago CBD office properties traded in 2014• Largest value since pre-recession levels
• 26 buildings totaling more than 15.5 million square feet sold
• 9 buildings under contract or sold in 2015 to date
> Record breaking Office Building Sales prices
300 N. LaSalle 1,302,901 SF
Sale Price: $850 million
Price PSF: $652
353 N. Clark 1,184,000 SF
Sale Price: $715 million
Price PSF: $604
> High Vacancy Buildings Still Trading = Buyer Optimism
311 W. Monroe 387,790 SF
Vacancy: 63.3%
• Golub purchased for $44 million ($113/SF) in 2012
• Sold to Glenstar/Prudential Insurance for $58 million
($150/SF) in 2014
Willis Tower3,781,045 SF
Sale Price: $1.5 billion*
Price PSF: $397*
* Projected
Chicago Office Market Highlights
6
> Falling overall vacancy rate of 12.6% • Best since pre-recession levels
Chicago Office Market Highlights
7
> Year-end positive net absorption of 1.4 million square feet • Best since pre-recession quarters
Chicago Office Market Highlights
8
> Average direct asking gross rental rates rose to $35.11/SF• An increase of 7.2% from the prior year
$39.66
$32.50
$24.92
$35.11
Vacancy Rates by Submarket
9
River North and West Loop submarkets continue
to outperform other downtown submarkets.
Source: Costar; Colliers International Research
Vaca
nc
y(%
)
2012 2013 2014
0.0%
5.0%
10.0%
15.0%
20.0%
Central Loop East Loo p North Michigan Ave. River North West Loop
14.4%
15.7%14.9%
13.6%13.0%
14.2%
15.3%16.1%
10.4%
12.5%12.9%
15.7%15.3%
8.3%
11.4%
Source: CoStar; Colliers International Research
River North Insights
10
• River North is the tightest of all CBD
submarkets with single digit vacancy
• Home to residential and restaurant/
entertainment corridor coupled with new
office development and redevelopment.
• Infiltration of many of the City’s tech
companies transforming old warehouses
and lofts into a lively office environment
• Rebirth of the Merchandise Mart into flagship for innovation – 1871
• Large blocks of space scarce in River North causing repositioning in other
submarkets to attract tech tenants
River North Highlights
11
• Only submarket with a single-digit vacancy
rate at 8.3% - more than a 200 basis points
less than prior year
• 2014 absorption relatively small at 33,568 SF
is reflective of limited available choices
• Future relocations of expanding tech tenants
such as Google and Go Health should result
in greater absorption
• Growing technology sector continues to absorb the little remaining unique
space options in River North
• Upward movements on River North rental rates to $35.25/SF average
represents a 5.3% increase over prior year
West Loop Insights
12
• Continues to be preferred choice for high
profile tenants, professional service firms,
financial service firms and corporate users
• Proximity to transportation and the
outstanding Wacker corridor vistas are a
perceived plus
• Highest concentration of Class A and Trophy Buildings and home to the newest
Class A Trophy Buildings in 444 W. Lake Street and 150 N. Riverside Plaza
West Loop Highlights
13
• Current 11.4% vacancy lowest since mid-2008
• Over 562,000 SF of positive net absorption –
strongest of all CBD submarkets
• Highest amount of Class A space availability –
3,266,780 SF (direct and sublease space)
• Average Direct West Loop gross rents
increased 5.8% over past year
• Positive demand and upward rent momentum
should continue in the near future
The “Sterlingization” of Chicago
14Source: www.sterlingbay.com/portfolio/featured-properties
1KFulton1000 W. Fulton
Fulton West1330 W. Fulton
121 W. Wacker 564 W. Randolph 325 W. Wells
111 N. Canal 400 S. Jefferson Fulton Market
Developments
626 W. Jackson 300 W. Adams
Case Study | 400 South Jefferson Street
15
• As a result of a corporate restructuring and
consolidation, Sara Lee sought to relocate
their Downers Grove headquarters to
downtown Chicago or an alternative location.
• Downtown amenities
• Non-high rise
• Outdoor space
Wish List• Class A systems
• Flexible environment
• Tight timeframe
2011
2013
2014
2015
2012
Case Study | 400 South Jefferson Street
16
APPROACH
2011
2013
2014
2015
• In January, Sterling Bay purchases Class C
property at 400 S. Jefferson for $10 million
• Colliers International begins talks with Sterling
Bay about the property’s potential fit for Sara
Lee/Hillshire Brands
• Within 45 days, 234,936 SF 15-year lease
transaction completed
• TIF incentives secured from the City of Chicago
at a value of approximately $5.5 million
2012
Case Study | 400 South Jefferson Street
17
APPROACH
• In December, Hillshire Brands moves into new
headquarters complete with 30,000 SF roof
deck and extensive signage
2011
2013
2014
2015
2012
Case Study | 400 South Jefferson Street
18
APPROACH
• In May, Sterling Bay sells property to Cole
Corporate Income Trust for over $97.5 million
or $417/SF for a substantial profit.
2011
2012
2013
2014
2015
Case Study | 400 South Jefferson Street
19
APPROACH
• In January, Cole Corporate Income Trust sells
property as part of a larger portfolio for
unknown price
2011
2012
2013
2014
2015
Chicago’s Vanishing Office Spaces
20
FCB Center
101 E. Erie
224,565 SF Office Hotel
Oriental Theater
Building
32 W. Randolph
220,606 SF Office Multi-
Family
Dearborn Bank
Building
203 N. Wabash
137,364 SF Office Virgin
Hotel
100 W. Monroe
130,976 SF Office Hyatt
Hotel
Gibbons/Steger
Building
20 - 28 E. Jackson
194,000 SF Office Infinite
Student Housing
360 N. Michigan
260,823 SF Office London
House
Hotel
Old Colony
Building
407 S. Dearborn
157,406 SF Office Student
Housing
11 S. LaSalle
290,000 SF Office Marriott
Residence Inn
29 S. LaSalle
159,973 SF Office Multi-
Family
39 S. LaSalle
209,597 SF Office Kimpton
Hotel
Chicago
Motor Club
68 E. Wacker
62,548 SF Office Hampton
Inn
Chicago’s Vanishing Office Spaces
FCB Center
101 E. Erie
224,565 SF Office Hotel
Oriental Theater
Building
32 W. Randolph
220,606 SF Office Multi-
Family
Dearborn Bank
Building
203 N. Wabash
137,364 SF Office Virgin
Hotel
100 W. Monroe
130,976 SF Office Hyatt
Hotel
Gibbons/Steger
Building
20 - 28 E. Jackson
194,000 SF Office Infinite
Student Housing
360 N. Michigan
260,823 SF Office London
House
Hotel
Old Colony
Building
407 S. Dearborn
157,406 SF Office Student
Housing
11 S. LaSalle
290,000 SF Office Marriott
Residence Inn
29 S. LaSalle
159,973 SF Office Multi-
Family
39 S. LaSalle
209,597 SF Office Kimpton
Hotel
Chicago
Motor Club
68 E. Wacker
62,548 SF Office Hampton
Inn
more than 2 million SF of Office Space “vanished” in 2014...
21
River Point444 W. Lake Street
1,073,100 SF
Occupancy: First Quarter 2017
Asking Rent: $32.00 - $48.00/SF net
150 North Riverside150 N. Riverside Plaza
1,214,574 SF
Occupancy: First Quarter 2017
Asking Rent: $32.00 - $36.00/SF net
New Construction
22
Over 58% Leased
Over 46% Leased
1K Fulton1000 W. Fulton Market
689,067 SF
Occupancy: 2015
Asking Rent: $26.00 - $30.00/SF net
Additional Notable Construction
23
Over 90% Leased
What’s Next?
24
> New Class A trophy buildings poised to emerge in 2018-2019
The John Buck Company
151 N. Franklin 710,000 SF
Tishman Speyer
130 N. Franklin 1.1 million SF
What’s Next?
25
> Workplace strategy and delivery will continue to evolve
• Always will be need for some bricks and mortar
• Obsolete real estate will be replaced with real estate ingenuity
• Technology will continue to dictate the future of the workplace
> Existing Landlords will continue to push rental rates and new owners
will look to justify climbing purchase prices and optimistic pro formas
> Residential and Hotel conversion from office will continue to
revitalize obsolete buildings in the CBD
What’s Next?
26
> Construction costs will continue upwards
> After a sustained post-recession quiet period Chicago has
appeared to regain a real estate equilibrium where again:
• Lenders lend... Developers develop... Appraisers appraise... Buyers buy
> Chicago will continue to be an economic engine for the Midwest
> Future talking heads will be “cautiously optimistic” about the real
estate landscape ahead
> These metrics will continue... until the next cycle of overbuilding
and oversupply, falling demand or economic downturn
Conditions of the Chicago Real Estate Market Downtown Office Market | 2015March 12, 2015
David J. Gelfand Executive Vice President
Colliers International
presented by:
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