Thursday, February 23, 2012

West Loop: Most desired submarket adds to occupancy

The West Loop continues to lead the rest of the CBD, gaining 732,000 square feet of occupancy in 2011. Its strong performance has been expected as its location is the most desirable for executives. With the inclusion of the two largest commuter train stations and relatively easy access from the CTA lines, it is the most convenient submarket for the majority of commuters. Class A performance was especially solid during the quarter, as the space Wells Fargo has leased at 10 & 30 South Wacker has been removed from direct availability. With this, the Class B segment has suffered as it will be vacating space at several Class B buildings, but the net result is positive.

While not the most active submarket in terms of leasing activity, the West Loop is likely to see more benefits to occupancy as a result of this quarter's deals. DeVry signed a 77,000 square foot lease at 300 South Riverside and will be moving employees from Suburban Chicago. West Monroe Partners' 43,000 square foot lease also represents new demand for the submarket. GE Capital is expanding by 79,000 square feet in its renewal at 500 West Monroe.

Investment sales that closed during the quarter were on both ends of the spectrum. 250 South Wacker was purchased by Credit Suisse for $91 million ($371 per square foot) while 400 South Jefferson was purchased by Sterling Bay for $15 million ($49 per square foot). Sterling Bay will upgrade 400 South Jefferson to accommodate Sara Lee's new CBD headquarters by 2013. Sara Lee will be vacating its East-West Suburban Chicago headquarters to take advantage of the young labor pool in the CBD.

The West Loop’s borders are defined as the Chicago River (North), I-94/I-90 (West), Wells Street (East), and Van Buren Street (South).

For more information on the Chicago office market, please reference our 4th Quarter 2011 Chicago Market Overview and Submarket Snapshots.

Thursday, February 16, 2012

TIF: Promoting Property Redevelopment and Employment Growth in Chicago

What is Tax Increment Financing (TIF)?

The City of Chicago is one of many cities that utilizes a public and private fundraising program called Tax Increment Financing (TIF) to subsidize redevelopment and infrastructure improvements across designated areas. Funds are normally allocated in union with a private development project, such as a company relocating its headquarters to the city. In order for projects to receive funding, minimum requirements (e.g. timelines for redevelopment, jobs created, and jobs retained) must be fulfilled. Each district is formed with specific goals to help improve real estate values. Currently, there are 163 TIF districts covering 30% of the City’s physical area and 10% of its property tax base. The overarching goal of the program is to attract new businesses and expand current companies to create more employment opportunities for residents.

How are funds raised?

Once a certain area is classified as a TIF district, a base amount is set by aggregating the amount of property tax generated. The City of Chicago uses a method of Equalized Assessed Valuation (EAV) over a period of 23 years. The growth in property tax over the base amount results in funds that can be used for each district’s redevelopment efforts.  These funds can be applied for approved projects as they are accumulated  or to pay back bonds issued for upfront costs. At the end of 23 years, the increase over the base amount is distributed among Chicago’s taxing bodies based on property values.

Recently Approved TIF Legislation

Three firms recently received significant TIF funding as each committed to moving its corporate headquarters to Chicago. The retail and food service divisions of Sara Lee Corporation was approved to receive $5.0 to $6.5 million when they relocate its offices from Downers Grove to a redeveloped building at 400 South Jefferson. Although not finalized, Sara Lee is in discussions to occupy between 200,000 and 220,000 square feet. The company will relocate 500 full-time positions from Downers Grove and plans to add 150 new full-time over the next four years. Essentially, Sara Lee receives $10,000 per job created in Chicago and must retain at least 500 positions over the next 10 years in order to keep its TIF funding. The reimbursement will help offset the approximately $30 million cost of redeveloping and building out the space.

Coyote Logistics, one of the fastest growing companies in the nation, is in the process of securing TIF funding for relocating its headquarters from Lake Forest to the Green Exchange building on Chicago’s near northwest side.  The approved funds would partially reimburse the cost to build its new state-of-the-art office space. In return, Coyote Logistics agreed to relocate all full time jobs as well as create hundreds of new jobs in the first two years of the lease. Last month the company announced plans to create at least 400 new positions in 2012. MB Real Estate represented Coyote Logistics in lease negotiations and managed the construction of its new offices.

A steel company was recently approved for TIF funding for their corporate relocation from Ohio. The company leased 29,000 square feet at 227 West Monroe and was approved for TIF funds to help offset buildout costs, pay off its existing lease in Ohio, and help aid in the higher real estate cost of doubling the size of its headquarters. To receive TIF funding, the company must retain the number of full-time employees currently at two production facilities in Chicago. Of the employees currently based in Chicago, 50 high-level executives would be moved to the new corporate headquarters. An additional 50 positions must be added, either from Ohio or as new hires, within the next four years. MB Real Estate represented the company in their lease negotiations.

Recent Projects Returning TIF Funds

While beneficial, some firms have not been able to capitalize on TIF funding. Three large companies recently returned or rejected a combined $34 million in previously approved TIF funds. CME Group chose not to accept $15 million for headquarter construction work after settling tax issues with the state. CNA group was approved to receive $13.7 million to renovate its headquarters. However in 2010, the group fell short of the 2,700 employees needed to receive TIF funding, prompting the group to return funds to the local taxing districts. Similarly, Bank of America returned $5.4 million dollars last November to the River West TIF District after failing to retain 2,700 employees. The company had been awarded funding for ABN Amro and the redevelopment of 540 West Madison.

Outlook

With the initiatives put in place by Mayor Emanuel, Chicago’s TIF program is poised to become more efficient and effective in creating and retaining jobs for Chicago. In the past few years the economy had kept firms such as CNA and Bank of America from capitalizing. But in less than a year in office, Emanuel has shown a commitment to bringing more jobs to the city, with more than 5,500 new jobs announced among 11 companies.  Companies approved for TIF funding will be more closely monitored to make sure they are in full compliance with their obligations. Companies considering expanding within or relocating to Chicago should be cognizant of the TIF program and the benefits it can provide in retaining and attracting a talented workforce.

Monday, February 13, 2012

East-West Submarket Snapshot: Rebound continues, but direct vacancy is still more than 20 percent of inventory

The East-West submarket led demand within Suburban Chicago through 2011. As the most central of the submarkets, with executive housing stretching from Hinsdale to Naperville and direct interstate access to the entire MSA, the submarket has mounted a rebound.

The “flight-to-quality” trend is most apparent in the East-West submarket. This has created an increase in occupancy of nearly 300,000 square feet in Class A, while Class B lost more than 150,000 square feet of occupancy. Class A direct gross asking rates rose by 4 percent this year, indicative of landlords’ increased pricing power with improved conditions.

Arboretum Lakes West, located at 1011 Warrenville Road in Lisle, has been particularly active. Last quarter, Sun Coke Energy occupied 40,000 square feet. This quarter, three lease transactions increased occupancy by nearly 64,000 square feet.

Only two large transactions occurred during the quarter. While one company contracted, another expanded. CA Technologies will be downsizing by 17,000 square feet and relocating within Lisle, moving from 2400 Cabot Drive to 83,000 square feet at the Central Park of Lisle II at 3333 Warrenville Road. On the other hand, Comcast renewed for eight years and expanded by 39,000 square feet at 2001 York Road. The building, which was hit with a foreclosure suit in October 2011, will be 90 percent leased. However, Comcast’s likely reduced rents under the new lease may still force owner John Buck to give the building back to its lender.

The East-West submarket encompasses Cook, DuPage, Kane, Kendall, and Will Counties, with major cities including Downers Grove, Lisle, Naperville, and Oak Brook.

For more information on the Chicago office market, please reference our 4th Quarter 2011 Chicago Market Overview and Submarket Snapshots.

Thursday, February 9, 2012

Central Loop Snapshot: Pricing power returns to Class A landlords

The Central Loop continues to add occupancy as the recovery spreads eastward from the West Loop. Positive absorption of 215,000 square feet during the quarter led to a yearly occupancy increase. Direct vacancy now stands at 13.8 percent, while Class A vacancy is 9.6 percent. By surpassing the crucial 10 percent equilibrium threshold, Class A Central Loop landlords will be able to be more demanding with lease economics.

In the Class A segment, U.S. Bank’s move into 65,000 square feet at 190 South LaSalle was counteracted by Claro Group and Sara Lee vacating 70 West Madison to move to other submarkets. Class B occupancy grew by the largest margin driven by move-ins at 120 South LaSalle. Leases commenced for Private Bank and the Legal Assistance Foundation for 57,000 square feet and 56,000 square feet, respectively.

One new large contiguous block of sublease space became available during the quarter. Accenture is listing 61,000 square feet at 180 North LaSalle for sublease. Additionally, a new large block of direct availability was listed during the quarter at 222 North LaSalle. Although not available for occupancy until June 2014, its nearly 200,000 square foot size makes it a viable option for large tenants that have faced limited options.

The sale of the office portion of the Block 37 development at 22 West Washington represented the highest per square foot transaction of the CBD during the quarter, reaching $418 per square foot. Additionally, the sale of 35 West Wacker by Piedmont to UBS Realty equated to $346 per square foot. These types of sales demonstrate the robust investment activity for Chicago’s CBD.

The Central Loop’s boundaries are the Chicago River (North), Wells Street (West), State Street (East), and Van Buren Street (South).

For more information on the Chicago office market, please reference our 4th Quarter 2011 Chicago Market Overview and Submarket Snapshots.