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| Central Station Apartments, Evanston, IL - an M&R development |
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| Barbara J. Gaffen |
CHICAGO, IL – While the commercial real estate market
enjoyed increased activity across all sectors in 2013, some areas, like
apartments, performed better than others. But will rental investment continue
to shine as bright in 2014, or will it find itself in the shadow of other
commercial assets?
According to some of
the Chicago-area’s top commercial real estate firms, much of 2013 was spent
preparing for an even busier 2014.
Given the relocation of many top companies to downtown
Chicago, demand for new apartments, office, retail and restaurant projects in
2014 should all be up as workers look to achieve a live, work and play
lifestyle.
In fact, some firms
spent 2013 staffing up for a big ’14 push. MACK Companies, one of the largest
REO-to-rental specialists in Chicago, recently purchased an 8,000-square-foot
office facility to accommodate its growing business as it expands into
commercial development and construction arenas in 2014.
As it’s anyone’s
game to win in the upcoming year, Chicago-area real estate experts weigh in
with their predictions for the top commercial real estate trends for 2014:
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| Jacob Gehl |
1. Silver Tsunami: With 60 million baby boomers entering
their senior years, real estate practitioners should see a plethora of health
care deals in 2014.
“As the silver
tsunami approaches, senior living providers will find golden opportunities as
demographics will demand more senior housing in the coming decades,” said Jacob
Gehl, founder and managing director of Blueprint Healthcare Real Estate
Advisors.
“Likewise, savvy real estate investors will find this asset
class to be need-driven, recession-proof, growing, profitable and stabile.
“The aging population should allow for the easy absorption
of new construction in the healthcare real estate market.
“ However, those investors migrating from the major food
groups of real estate into senior housing and healthcare will find themselves
requiring sector specific expertise.
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| John Wilson |
“Those entering the healthcare real estate market should
align themselves with an industry focused advisor or operating partner as deals
in this sector require an understanding of healthcare as well as real estate.”
Coupled with the
aging population trend, new U.S. healthcare laws are estimated to provide
insurance for an additional 30-40 million Americans.
To meet this demand
and gain market share, healthcare providers will continue to develop their
network of outpatient facilities, where quality, targeted care can be delivered
in a much lower-cost setting.
“Reducing cost will
be a driving factor for healthcare providers going forward,” said John
Wilson, president of HSA PrimeCare.
“Providers have realized treating
patients in well-located outpatient centers is convenient for patients and has
become a requirement. As a result, real estate has elevated significance in the
business strategy of healthcare delivery.”
To further enhance patient access to quality care, providers
will adapt their real estate to combine practices and services in a very
inviting setting at multi-specialty facilities.
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| William Di Santo |
Wilson said common lobbies, flexible exam rooms, and shared
nursing stations between different practices will be commonplace to eliminate
redundancies, control costs, and to facilitate alignment between the health
system and newly-acquired physician practices.
Gehl agreed, noting, “Competition will be high in this
market and providers that deliver comfortable settings and the best patient
experiences will come out on top,” he said.
2. Everybody Eats: As the economy continues to improve, so
too will consumers’ appetites for dining out. William Di Santo,
president of Englewood Construction, said restaurants construction will be busy
in 2014 as many restaurateurs attempt to locate to urban cores, giving them
direct access to heavy foot traffic. However, many of the locations will need
to be retrofitted to house a restaurant.
“Most of the prime available space in city centers right now
was designed for a retail operation,” said Di Santo. “Restaurants have done
very well in the recovery, because they don’t need to compete with on-line
competition as many traditional bricks-and-mortar retailers do.
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| Lee Kiser |
“ As they begin to flex their muscles more and move into
urban cores, experienced commercial general contractors will be necessary to
retrofit locations to serve a restaurant operation.”
3. #2 is Really #1…: According to Lee Kiser,
principal and founder of Kiser Group, Chicago’s downtown market may be in
jeopardy of experiencing rent declines, while select neighborhoods will remain
stable – and may even see rent increases.
“With the downtown market, it is simply a supply and demand
issue. More new construction units will come online in 2014, increasing
competition in an already tight market and making it difficult to increase
rents,” said Kiser.
“However, many Chicago neighborhoods are set to perform
better than downtown due to less density. The rising popularity of certain
areas and lack of new supply should result in hefty rent increases during 2014,
similar to what was experienced during 2013.”
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| Darren Sloniger |
One firm taking
advantage of fast-growing non-urban core neighborhoods is Prime Property
Investors (PPI), which owns and manages The Arbors of Brookdale in
Naperville as well as a number of student housing developments in strong
secondary markets like South Bend, Ind. and Knoxville, Tenn., and recently
broke ground on Alexan at Auburn Lakes in a Houston submarket called The
Woodlands.
“The Houston metro
area continues to set the pace for job growth in the nation and The Woodlands
is one of the fastest-growing submarkets,” said Barbara J. Gaffen,
co-CEO of PPI.
“Lower land and construction costs, compared to the urban
core of Houston, coupled with high renter demand make non- downtown properties
an attractive investment with great opportunities for additional growth.”
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| Anthony Rossi Sr. |
Also bullish on
secondary markets is The Marquette Companies, which in 2013 invested in several
non-core urban projects, including a 400-unit rental community in Granger, Ind.
“As the competition
for properties in major metropolitan areas has increased, it has pushed pricing
to a point that has made it more difficult to buy in those areas,” said Darren
Sloniger, managing director of acquisitions for The Marquette Companies.
”Purchasing well-located properties in secondary markets with high barriers to
entry provides a good alternative for us right now.”
4. …Unless You’re Talking Retail: Instead of chasing rooftops
like during the housing boom and eventual bust, retailers in 2014 will opt to
pay higher rents in heavily-trafficked, mature markets, predicts Greg
Schott, managing principal of L3 Capital LLC.
“Cap rates in urban cores are reaching historic lows and
rents are continuing to increase in prime locations,” he said. “Investors who
have entered these markets have seen favorable returns and strong retailers
view them as safe moves.”
For example, L3
recently sold two properties in the Beverly Hills and West Hollywood market for
a combined $62 million, approximately $27 million more than it paid for the
properties a few years ago.
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| Steven Fifield |
Di Santo agrees, adding large-scale retail projects in urban
cores that were sidelined by the downturn will be re-initiated as consumers and
retailers continue to gain confidence.
“A lot of projects that were planned four or five years ago
never got off the ground,” he said. “This has produced a number of prime urban
locations developers could build on next year. We’ve had steady construction
activity in the retail industry for a few years, but big projects have not been
too common. I expect that to change in 2014.”
5. Midrise Mania: With less risk and upfront investment than
larger developments, midrise buildings address a growing demand for new
residential supply.
"Midrise
projects will be attractive for a number of reasons, including the flexibility
they offer in terms of location as well as their cost and construction
timeline," said Anthony Rossi, Sr, president of M&R Development
and RMK Management Corp.
"Municipalities and building codes are often far more
open to midrise buildings, especially when it comes to an infill site outside
of an urban downtown location, like our Central Station apartment building that
opened earlier this year in Evanston, Ill."
Steven Fifield, president of Fifield Companies noted
that 2,000-square-foot, three-bedroom condos can be delivered more cost
effectively in midrise buildings than smaller units in large high rises in
nearby neighborhoods.
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| Greg Schott |
"The condo
demand has changed from the boom days of 2000 to 2007 in that couples and young
families who want to live downtown now are looking for larger units than the
one- and two-bedroom high-rise condos that were so prevalent during the boom,”
he said.
“Developers looking to meet this new condo demand will face
less risk and more financial ease from banks with a midrise project.”
6. Tech Spec: Another bright spot in 2014 will be the
increased amount of speculative construction in the industrial and distribution
sectors.
HSA Commercial initiated three industrial spec buildings in 2013 and
thinks others will follow suit due to the lack of high-cube, Class A industrial
product suitable for warehousing and logistics tenants that are seeing rapid
growth in e-commerce and new investment in industrial projects.
"Institutional investors have started to take an active
interest in industrial spec development since they are realizing the
risk-adjusted rate of return is more compelling than competing aggressively for
fully-stabilized real estate assets,” said Bob Smietana, vice chairman
and CEO of HSA Commercial.
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| Bob Smietana |
“With an infusion of
new capital and banks willing to lend to well-capitalized sponsors, developers
will continue to build spec projects in core markets like Chicago where vacancy
rates below 5 percent suggest there is still plenty of unmet demand.”
The wave of spec
development that started on the coasts has now reached Chicago, and HSA expects
secondary distribution markets will start to see new development activity next
year as well.
Look to new
industrial spec buildings to use new, energy-saving features as well, such as
Light Emitting Plasma (LEP) technology, an energy-efficient, low-maintenance,
high-lumen lighting solution.
Paul Burke, president of Lightficient, explained.
"LEP reduces energy bills by 50 to 70 percent on average and, once
installed, maintenance costs are greatly reduced. Return on investment is
realized within two years, so we anticipate more developers will use these
types of lighting solutions to remain competitive in 2014."
The Final Word on
Chicago Apartments: According to Fifield, whose firm has three Chicago-area
mid- and high-rise rental towers in various stages of approval and development,
apartment deliveries in downtown Chicago will begin to slow down after 2014,
but “With continued job growth, I believe the demand for rental apartments
downtown will grow to well over 2,000 units a year, allowing the absorption of
another 10,000 units over the next five years,” he said.
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| Seasons 52 Restaurant, Chicago, IL Edgewood Construction |
And Kiser predicts
that as Chicago’s apartment supply grows, rent increases are unlikely,
particularly in the luxury market.
“Cap rates may increase on downtown properties as NOIs will
decrease and interest rates will rise. For neighborhood properties, NOIs will
either remain flat or slightly increase with rises in rents,” he said.
“The apartment investment market will still be strong, but
as interest rates are primed to increase, buyers may find more favorable deals
in markets that have experienced little new construction."
For a complete
copy of the company’s news release, please contact:
Kim Manning
312-267-4527
Julie Liedtke
312-267-4521
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