2013 Real Estate Performance Review

Experts looking back on the 2013 commercial real estate market are noticing trends as baby boomers shift further toward retirement and millennials segue into the workforce, setting up …

Experts looking back on the 2013 commercial real estate market are noticing trends as baby boomers shift further toward retirement and millennials segue into the workforce, setting up a situation where new tastes and workforce strategies are reflected in real estate investment. Offices better located to take advantage of entertainment and dining became a bigger feature, as did other location amenities like residence options, gyms and transportation hubs. These changes are not made without considering efficiency, however and cost saving is also driving a bigger interest in office repurposing and environmental sustainability. For more on this continue reading the following article from National Real Estate Investor.

As we look back at the real estate sector in 2013, the operative word was “millennial”. When you look at the signature office developments in gateway cities across the country there are certain defining features of premium class-A office today – riverfronts, co-working spaces, 24-hour locations, bicycle stations and rooftops. Even the office floors look different with glass front offices, lounges, media rooms and a lot more natural light because of smaller core-to-window depths.

What does it all add up to? You can legitimately say that 2013 was a year when millennial tastes dictated the facts and features of office development. That’s no surprise: we are witnessing a generational shift as the 78 million baby boomers pass the torch to 80 million Millennials. How they work and live is changing the nature of the workplace.

Take downtown Chicago as an example. Firstly, the Chicago River, became the fourth quarter star of the market with a flotilla of new riverfront towers either planned or underway – 150 N. Riverside and the River Point office project will join the blockbuster apartment complexes Wolf Point West Tower and 111 West Wacker as new additions on the skyline (in all, there are 8 million sq. ft. of new downtown towers planned). At the same time, we saw the $361 million sale of 10 and 120 South Riverside Plaza, a two-building, 21-story class-A office property totaling more than 1.4 million sq. ft. by TIER REIT, Inc. to Ivanhoe Cambridge advised by Callahan Capital Properties. Clearly, the emergence of bankside projects (most of them are surrounded by plazas with boardwalks and retail amenities) is a result of young knowledge workers cherishing experience and environment in their workspaces – a shift from the old days of being cooped up in land-locked buildings in the financial district or Wacker Drive.

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Then there’s the supremacy of entertainment and dining districts. River North, the city’s most coveted office location and its tightest submarket is the center of the city’s dining, gallery, nightclub and shopping action. According to MB Real Estate, since the end of the recession, River North has seen its direct vacancy rate drop 730 basis points from 16.4 percent to 9.1 percent. This year, River North sealed its reputation as the Midwest’s Silicon Valley with the tech sector powering a boom in new construction and leasing. Firstly, we saw a migration from the suburbs represented memorably by Google Inc.’s 572,000-sq.-ft. lease at Merchandise Mart for its Motorola Mobility unit, which relocated from Libertyville. In the third quarter, software firm, GoHealth signed a 90,000-sq.-ft. lease at 222 Merchandise Mart and expects to bring 500 employees to the area by 2015. More recently, we are seeing a flood of startups taking space in stylish office buildings like 20 West Kinzie (site of Google’s Chicago headquarters) or 353 North Clark or in incubator spaces. Large blocks of space are now the rarity in River North. There are only six contiguous spaces of greater than 50,000 sq. ft. 

As we look ahead, we will see developers in trendy areas like River North repurposing office floors to create more co-working spaces where entrepreneurs can rent a desk or an office. Industrious Office, for example, has created a 17,000-sq.-ft. co-working space at 320 West Ohio and their brochure copy gives you a sense of its strategy: “Offering reserved seats in our coworking area, you will find Industrious to feel like your favorite neighborhood coffee shop. From solo entrepreneurs to small law firms, freelance designers, financiers, and growing startups, Industrious offers the ideal environment.”

Similarly, Microsoft Management is buying the 7-story 405 West Superior to create tech incubator space. In November, it was announced that Lightbank, the venture fund and startup lab, is launching a co-working space called the Warehouse inside its offices at 600 West Chicago, a former Montgomery Ward that has become one of the city’s primary tech addresses. The building’s tenant roster is a litany of quirky names, from Snapsheet, Fooda, Benchprep and Belly to Groupon Inc. and InnerWorkings Inc. The Warehouse will seat 100 entrepreneurs at $300 a month on month-to-month leases. All these tech incubators join 1871, the 50,000-sq.-ft. high-tech facility in the Merchandise Mart which is home to 240 startups and is now expanding to create larger suites that can accommodate 5 to 15 people. For the landlord, the challenge is that the prospective startup tenant may not have an established credit history, may have trouble anticipating its space requirements and leans toward short-term leases. As a consequence, we need to be creative and flexible, as well as well capitalized, to realize the opportunities.

The dearth of space in River North was a boon to the West Loop which has become its principle rival for tech firms. The West Loop has become famous as a restaurant row with eateries run by scores of celebrity chefs including Rick Bayless, Brendan Sodikoff, Stephanie Izard, Grant Achatz and Graham Elliot. Comprising one third of CBD inventory, the West Loop submarket accounted for almost half of the market’s year-to-date absorption. Due in part to space constraints in River North, tech firms such as I Tech, and PC Mall have moved to the West Loop. On the investment side, the Harbor Group sold the 512,000-sq.-ft. 300 South Wacker to Beacon Capital Partners for $112.7 million, or $220 per sq. ft., which would equate to a cap rate of 6.3 percent.

On the investment sales front, rooftop decks have become the value-add play of the season. A Sam Zell venture sold 200 S. Wacker, a 40-story 754,751-sq.-ft. building that is 95 percent leased for $215 million. Further east, Berkley Properties sold 111 West Jackson, a 24-story tower for $135 million. The notable thing here is that they acquired the building for $35 million when it was 29 percent leased and added $45 million in improvements including a rooftop deck. 

The drive to attract millennial workers and businesses is easy to understand given the generation’s economic heft.  They are the largest generation with the greatest combined purchasing power in history ($2.45 trillion worldwide by 2015, according to Forbes). There is no doubt – Millennials will set the tone for our industry for years to come.

Matthew Ward is Senior Vice President of The Alter Group responsible for The Alter Group’s Midwestern and Eastern regions, including 20 West Kinzie, a major high-tech office tower in River North. This year, The Alter Group has 2.5 million sq. ft. of development nationally, including its new West Loop development, 625 West Adams, a 490,000-sq.-ft., 20-story office building.


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