Chicago's So Hot They're Doing Double-Takes

Downtown Chicago office leasing is very active, and smart institutional capital has taken notice and is competing for trophy assets, panelists said at Bisnow's 5th Annual Chicago State of the Market last week. (They should involve physical challenges for institutional capital when the prizes are trophies.)

More than 300 of you joined us at the Swissotel Chicago last Thursday, where our Chicago outlook panel focused on both the future of office and the stability of need-based assets like healthcare as an alternative investment.

JLL tenant rep group co-leader Bill Rogers is busy as ever doing leases for firms like DLA Piper and William Blair. (His favorite business lunch spot is Tavern on the Park, we hear.) With 600k SF of leases signed this year, Class-A office is tightening and may soften with the delivery of Hines' River Point project and possible others like John O'Donnell's proposed tower, he says. Many tenants today are attracted to lower cost options that use space efficiently and create unique employee environments. (Look at Hillshire's redevelopment in the hot West Loop.) Class-B is seeing success with 5,000 SF to 10k SF spec suites, an easy move for tenants looking for no capital output, he adds.

MB Real Estate EVP Danny Nikitas says the market's moving back in the landlords' favor as savvy buyers like Shorenstein, Callahan, Beacon, and MetLife continue to pick up Class-A office. (MBRE-leased buildings include 181 W Madison, 10 and 120 S Riverside, and Michigan Plaza.) Around 10M SF of downtown office product has been added since '04, but we've only seen 5M SF of absorption during the same period, he says. The discrepancy has not hurt the current landlord momentum due to significant re-purposing of older office buildings to uses like hotels. (One man's trash is another man's luxury re-purposed hotel.) Danny, who business lunches at The Gage and Greek Islands, says class of office building is less relevant today as traditional office buildings, and loft spaces start to look a lot like each other.

Moving to the topic of demographic-based assets, we heard from Harrison Street co-founder, prez, and CEO Christopher Merrill. Though closed-end private equity funds and an open-ended income fund, Harrison Street focuses on need-based assets like student housing, seniors housing, medical office, and self storage, Christopher tells us, with 300-plus assets in 38 states. These fragmented asset classes have reduced volatility and offer more opportunities to generate higher risk-adjusted returns, especially with likely unsustainable 4% and 5% caps in multifamily and office, he says. Healthcare reform has already affected high-demand medical office pricing, and student housing's another area to watch. With the state budget issues, public universities don't have capital for on-campus housing, meaning 70-80% of students need to be housed off-campus, he says. (The futon market is about to explode.)

DLA Piper real estate head Richard Klawiter moderated, questioning panelists on the impact of the fiscal cliff cloud nationally and pension reform storm locally on commercial real estate. All agreed it's led to more governance, accountability, thought, and time behind space decisions. Companies don't want to make longer-term decisions during an uncertain political time, but everything could change in a few years as state-of-the-art office product comes online with too many bells and whistles to ignore. (For all we know, we could be beaming ourselves to work by then.)

Before the event got started, our publisher Mark Bisnow interviewed Fifield Cos CEO Steve Fifield (center, with Marc Realty principal Jerry Nudo and Structured Development founder Mike Drew). Steve says multifamily is in its 7th inning because experienced developers have already made their bets with current new construction and sites. New developers getting in the game, especially with more marginal sites, may be too late, since institutional equity and banks giving construction loans are weighing their participation in new deals very carefully, he adds. With the number of companies downtown growing, he expects absorption to move to over 2,000 units annually for 2013 to 2016, meaning the current new supply (5,000 units delivered this year and next) should be easily absorbed. The question is--what will 2015 starts for 2017 deliveries look like?

Apparently nobody got the memo about our costume contest except Interior Investments' Tracy Fioretti, who wins a Bisnow shoutout for best and only costume at our Halloween event. More pics from our event here.