Speakers share their thoughts on the Chicago office market at BOMA/Chicago’s mid-year review.

Here’s the good news from the BOMA/Chicago Mid-Year Market Review: Office real estate activity in Chicago is on the rise. The not-so-good news? The city still has a long way to go before deal activity reaches 2006 and 2007 levels.

In other words, Chicago is not unlike most cities across the country.

This is the takeaway from the BOMA mid-year review held June 11 at the Mid-America Club at the AON Center in downtown Chicago. The even featured a list of big-name Chicago real estate pros: Bob Chodos, principal at Colliers International; Maureen Ehrenberg, executive managing director of global facilities with CBRE; Bruce Miller, international director of Jones Lang LaSalle; and George Kohl, senior managing director of CBRE Asset Services and 2013 president of BOMA Chicago. It also featured an overview of the Chicago commercial market from Michael Cornicelli, executive vice president of BOMA/Chicago.

All of these speakers agreed that Chicago building owners and managers should be happy to see the increased deal activity in the city. They agreed, too, that everyone would like to see this activity increase, and soon.

More than 160 people attended BOMA/Chicago’s mid-year review.

Chodos, for instance, shared some positive news with the more than 160 attendees: He’s seen overall positive signs in Class-A, -B and -C office buildings in the city, something that shows that the market is trending in the right direction. He said, too, that rents in the city have increased by 2 percent in the first quarter of 2013 when compared to the same quarter one year earlier.

At the same time, 12 major corporations have moved their offices to the city’s downtown in recent months.

But there are challenges here, too. Chodos said that the number of large deals in the city is on the decline. Tenants aren’t looking for long-term expansion commitments, and these tenants are also demanding more services and amenities for lower rents.

Miller from Jones Lang LaSalle shared some of his own good news. He pointed out that Chicago has added more jobs since the economic downturn than has any other major metro market in the United States. He also said that companies today are moving downtown as a way to attract and retain young talent. He credited Chicago Mayor Rahm Emanuel with taking the steps necessary to attract businesses to the city, making Chicago more visible to the global business community.

As far as the numbers go, Miller said that office sales downtown hit their heights in 2006 and 2007 before tailing off in 2008 and taking a nosedive in 2009. The recovery in this sector began in 2010. He predicted $3 billion in Chicago office real estate sales in 2013.

Again, that’s good news. But attendees at the BOMA event can’t be blamed for wishing that number was even higher.

– Dan Rafter

Rockbridge Partners has big plans for the Canterbury in downtown Indianapolis.

Rockbridge Partners recently acquired the historic Canterbury Hotel in Indianapolis, a 99-room property located in the heart of that city’s downtown. Rockbridge plans to renovate the hotel into an upscale property. The company will spend big to rejuvenate the hotel’s lobby, expand its fitness center and update its lounge.

Rockbridge will also be taking part in a trend: A growing number of developers are purchasing and renovating hotels across the Midwest and the entire country.

CoStar Group recently reported on this trend, saying that hotel transaction volume is 50 percent higher this year compared to the same period in 2012. And this activity is spreading away from such traditional international gateways of New York, San Diego, San Francisco, Washington DC and Miami, CoStar writes. These cities have dominated hotel investment activity since 2010, according to CoStar.

That is changing, though, as activity spreads across the country, something that we are seeing in the Midwest.

The Millennium Hotel in Minneapolis recently reopened after a six-month renovation.

Consider Minneapolis, where the Millennium Hotel in that city’s downtown has recently reopened following a six-month renovation. Millennium Hotels and Resorts, owner of the property, spent $22 million to renovate all 321 of the hotel’s guest rooms. The company also renovated its public spaces.

And in Akron, Ohio, IRG Rubber City and Summit Development recently reached a deal with Hilton Worldwide to bring a Hilton Garden Inn hotel to the East End development in that city. The hotel will sit in a portion of the former Goodyear world headquarters campus. Construction of the five-story hotel is scheduled to wrap up in June of 2014.

What’s behind the boom in hotel transactions? CoStar cites the usual suspects: There has been a historically low level of new hotel supply in recent years. at the same time, hotel prices are rising and a relatively small number of hotel properties for sale in the largest metro areas of the country is causing investment activity to move into secondary markets across the country.

Art Adler, Americas chief executive officer of Jones Lang LaSalle’s hotels and hospitality group, is quoted by CoStar as saying that by the end of this year, U.S. transaction volume will reach $17.5 billion in the hotel sector. That would be an increase of 10 percent from 2012.

– Dan Rafter

Dominium is now building The Cavanagh, an independent-living facility, in Crystal, Minn.

How big is the market for seniors housing? The Administration on Aging recently reported that the number of U.S. residents 65 or older will hit 72.1 million by 2030. That’s an increase of more than 50 percent since 2000.

As the administration says, people 65 or older represented 12.4 percent of the population in 2000. By 2030, they’ll represent 19 percent.

It’s little surprise, then, that Plymouth, Minn.-based Dominium — a developer and manager of affordable-housing projects — is now making a big push in the senior-housing market. The company, which will focus its efforts on independent senior living, is now developing a pair of senior-housing communities, one of which is The Cavanagh, a 130-unit development being built in Crystal, Minn.

Ron Mehl, senior developer with Dominium, said that the country’s — and the Twin Cities’ — demographics support the company’s extra push into this market.

In a phone interview, Mehl pointed to a recent report by the Metropolitan Council saying that in 2010, people 65 or older made up 10 percent of the population in the Twin Cities area. By 2030, this group of residents will make up 20 percent of the population here, according to the report.

And these people will have to live somewhere.

“The demographics speak for themselves,” Mehl said. “We have a large population of aging Baby Boomers. We have longer life expectancies. We will need more seniors housing.”

As more proof of just how strong this market is today, the National Investment Center for the Seniors Housing and Care Industry, reported that 2011 saw more than $25 billion worth of senior-housing transactions. That is the best year for seniors-housing activity since the real estate boom years of 2006 and 2007.

A survey conducted in the fourth quarter of 2012 by National Real Estate Investor magazine and Senior Housing Investment Advisors, found that 65 percent of respondents said that they expected investment activity in the seniors housing market to rise during the following six months.

And today’s seniors have high expectations for their housing, Mehl said.

“They want all the amenities that you’d find in a single-family home,” he said.

Seniors want large kitchens and plenty of storage areas. They want extensive common areas that include salons, exercise facilities, theaters and party rooms. Every home or apartment needs washing machines and dryers.

These properties must feature extensive outdoor amenities, too. This includes gazebos, gardens, outside seating areas and trails.

Dominium is willing to commit to these amenities, Mehl said. It’s the only way to serve this market. And the boom in the seniors market is no short-term thing.

“The demographics are telling us that this isn’t going away,” Mehl said. “Older Americans are becoming a bigger percentage of the overall population. And they have very specific needs and wants from their housing.”

– Dan Rafter

KC Conway

Colliers International found something interesting in its most recent industrial report: Midwest markets are leading the way when it comes to industrial activity.

Colliers’ first quarter 2013 industrial report found that three of the top-five markets for net absorption during the quarter were Midwest cities: Chicago, which ranked first, Detroit (fourth) and Cincinnati (fifth). Los Angeles and Atlanta joined them.

According to the report, industrial net absorption was strongest during the quarter in the Midwest, a region of the country that saw 17.5 million square feet of industrial space absorbed. The South came in second, with 13.4 million square feet of absorption.

What’s behind all this industrial activity? In an interview with Midwest Real Estate News, KC Conway, chief economist for the United States with Colliers, said several factors worked together to account for the Midwest’s strong showing.

First, the country as a whole is in the middle of a manufacturing renaissance. Manufacturing is coming back to the United States in part because companies are worried about their patents not being honored in other countries. This has benefited the Midwest, a traditional center of manufacturing activity.

Secondly, automation has reduced the amount of labor that companies need to build their products. As labor costs decrease, more companies are finding it affordable again to return their manufacturing centers to the United States.

As Conway says, companies today can generally manufacture the same amount of product with a workforce that is 15 percent to 20 percent smaller than it was 25 years ago. At the same time, energy is reliable and affordable in the United States.

“We have the most reliable electric grid system. We have the cheapest forms of energy, whether a company uses natural gas or coal,” Conway said. “When you have a situation like that, you don’t have to move manufacturing around the world as much.”

And that, again, benefits the Midwest. More companies will locate in the Midwest if they’re not as tempted to send their manufacturing operations overseas.

Finally, the Federal Reserve Board during the last five years has enacted policies that have devalued the dollar. From a currency-exchange perspective, that also makes operating in the United States more affordable today for more companies.

The future looks good for manufacturing in the United States and Midwest, too, thanks to the expansion of the Panama Canal. This expansion project will double the capacity of the canal by 2015, allowing larger ships to move through the canal’s waters. This will reduce the importance of port cities, meaning that more industrial activity can move away from such cities and toward inland markets, including those in the Midwest.

“This is a definite advantage to the Midwest,” Conway said. “Companies won’t have to bring everything to California and rail it across the country. They won’t have to spend as much time and money to get their shipments to the Midwest.”

All of these factors add up to what Conway calls a sustainable long-term trend of industrial growth for the Midwest.

And because the Midwest is already a hub for the automotive industry, which is thriving today, the industrial markets look poised for a long period of strength in this part of the country, Conway said.

“And it’s not just auto. The Midwest is also seeing a boom in medical-device manufacturing,” Conway said. “We are even seeing furniture manufacturing returning to the country. So the manufacturing renaissance is real and sustainable. That’s good news for the entire country, and especially for the Midwest.”

– Dan Rafter

A new Fresh Market will soon be opening in the Chicago suburbs.

The specialty grocer market remains a hot one across the Midwest. Marcus & Millichap Real Estate Investment Services recently cited expansion plans by Trader Joe’s and Whole Foods as providing a significant boost to the retail sector in Minneapolis. And late last year, the company said the same thing about the Milwaukee market, which has seen increased competition among specialty grocers and the grocery offerings of such big-box stores as Wal-Mart and Target.

Chicago, too, has seen its share of new grocers entering the market.

Steve Frishman, principal and vice president with Oak Brook, Ill.-based Mid-America Real Estate Group, said during the TCN Worldwide Conference earlier this year that customers in Chicago and its suburbs are flocking toward smaller, independent grocery stores that offer gourmet, pre-made meals.

He points to Mariano’s Fresh Market. These stores always draw a crowd when they open in the region, he said.

“Mariano’s is the big name right now,” Frishman said. “They become the talk of the town when they open up.”

Now a new specialty grocer is entering the Chicago market, with The Opus Group begining construction of a new 31,175-square-foot grocer-anchored retail center in the suburb of Glen Ellyn. The Fresh Market grocer is serving as the anchor tenant of this development, set to occupy 20,300 square feet of space.

“The Fresh Market is one of the most active grocers in the Chicago market, and we’re thrilled to be working with them and the village of Glen Ellyn to bring their store to the area,” said Sean Spellman, vice president and general manager of Opus Development Company, in a written statement.

The project will turn a vacant car dealership into a retail center that includes patio seating and 186 customer spaces. The center is already 75-percent leased with additional tenants including Great Clips and Tide Dry Cleaners. This will mark the first Tide Dry Cleaners in the Chicago area.

Construction on the project is scheduled to wrap up in late 2013, with The Fresh Market store expected to open in late 2013 or early 2014.

And it’s clear that the new Fresh Market won’t be the last specialty grocer to set up shop in Chicago. This is one trend not ready to slow.

– Dan Rafter

Popeyes is set to make a big impact in Minneapolis this year.

Here are the major retailers opening new locations in Minneapolis this year: Popeyes, Trader Joe’s, Whole Foods and Goodwill.

It’s a strong list, and it speaks to the strength of the Minneapolis commercial real estate market in general: Minneapolis is one of the strongest markets in the Midwest, and retailers understand this.

That’s the message from from Marcus & Millichap Real Estate Investment Services, which took a close look at the Minneapolis retail market in a 2013 second-quarter report on this important commercial sector.

Highlights? First, there’s chicken fast-food company Popeyes. The company moved into the Minneapolis area in 2012 by purchasing 13 former KFC locations. The chain recently opened its first converted restaurant in the metro area this year, and plans to have all of its new Minneapolis-area sites open by the end of this summer.

Specialty grocer Trader Joe’s will also make an impact in the Minneapolis area. The grocer will soon complete a new store in Shoreview, Minn. At the same time, Whole Foods, another specialty grocer, will open in the 222 Hennepin Apartments building in downtown Minneapolis. A third grocer, Lakewinds Natural Foods plans to open a 20,000-square-foot location in the Lyndale Gardens redevelopment in Minneapolis later this year.

Finally, Jerry’s Enterprises plans to build its own 68,000-square-foot grocery story in Woodbury, Minn. A pair of new Wal-Mart Supercenters in the region will add to the grocery mix.

The real positive in the Minneapolis area? According to Marcus & Millichap, demand for retail properties is outpacing the supply. This helps explain why developers in the area will add 1.1 million square feet of retail space in 2013. Vacancy rates in the retail sector are expected to fall this year, too, with Marcus & Millichap predicting that job growth and a growing population base will cause retail vacancy rates to fall by 110 basis points to 8.3 percent. That’s a slight improvement from 2012, when vacancy fell by 70 basis points.

Rents, too, should rise, good news for landlords. According to Marcus & Millichap, shopping center rents should rise by 2 percent in 2013, jumping to $13.73 a square foot.

– Dan Rafter

Matt Ward

Guest post by Matt Ward, senior vice president, The Alter Group

At its 2007 peak, the CMBS market reached $230 billion in sales and backed 40 percent of all commercial real estate lending. While we are a long way from that crest, CMBS has fought its way back.

After posting $48 billion in 2012, issuances could hit $80 billion in 2013 and $100 billion in 2014. Part of the reason is that there is a shortage of bonds in the market because so much of the 2007 stock matured last year. All of this is good news for the industry because the simple truth is that we can’t function without CMBS.

The bond market remains the principal way that developers and owners convert temporary financing (often three-year construction loans) into permanent financing. In addition to office, sectors like retail and hotel use it as their primary source of debt.  Typically, this is accomplished with conduit loans, which are converted into securities and sold to investors.

In early 2012, some commercial real estate industry authorities feared that when existing commercial loans matured, they would not be able to refinance and the properties would revert to REO status for portfolio loans and special servicing for securitized debt. However, the Fed’s announcement of low interest rates until 2015 meant that returns on T-bills narrowed to as little as 150 basis points, forcing the global investment community to look for yield elsewhere.

This was followed by the launch of QE4 in December, which releases $85 billion a month in investment money back into the economy. The surge of capital benefits real estate securities that offer investors relatively high yields (we’re seeing B-piece CMBS investors achieving 20 percent and higher yields) and relative safety (CMBS delinquencies – at just 9.03 percent in April – have hit their lowest levels in two years).

The new conduit

Borrowers considering CMBS loans will find available money at attractive rates, primarily because investors have achieved a comfort level because lenders have moderated leverage and increased transparency on conduits. As a point of comparison, while portfolio lenders will make non-recourse, loan-to-value loans of up to 65 percent, CMBS lenders will go as high as 75 percent.  Although the LTV is not at the 90 to 95 percent level that prevailed before the financial crisis, it is loosening the credit market and creating liquidity. Large-loan CMBS is also more competitive as compared to multi-borrower conduits.

The CMBS bump

The return of CMBS along with increased lending by regional and community banks means more transactional activity this year. According to ULI/Ernst & Young, CRE volume could top $310 billion in 2103.

The liquidity that CMBS brings means a broadening in the real estate market from a purely core institutional focus to more investment by private buyers and more transactions in secondary and tertiary markets.

Matt Ward is senior vice president of Chicago’s The Alter Group. He can be reached at 847-568-5922 or by e-mail at mward@altergroup.com.

A national accounting firm is moving into Detroit’s Compuware building.

It’s a slow process, but downtown Detroit is steadily attracting new businesses as the city’s rebound continues.

The latest example? One of the biggest accounting firms in the country just announced that it will set up shop in one of downtown Detroit’s key office buildings.

Plante Moran, a certified public accounting and business advisory firm, earlier this month announced that it is opening an office in Detroit in the city’s Compuware building.

And company officials said that they are excited to be part of the rebuilding efforts in this key Midwest city.

“We are very pleased to be joining other businesses who have committed to the city of Detroit,” said Gordon Krater, Plante Moran’s managing partner, in a written statement. “There is an excitement and vitality about the city. Good things are happening, and we are proud to be a part of it.”

Detroit Mayor Dave Bing, also in a written statement, added, “This is great news for the city of Detroit. This is another example of the business community’s commitment to transforming our city.”

The new office will be home to about 75 staffers, and will occupy 15,000 square feet on the third floor of the Compuware building.

The Detroit office will be the firm’s seventh office in southeast Michigan, joining the company’s offices in Ann Arbor, Auburn Hills, Flint, Macomb and two in Southfield.

The official move-in date for the Detroit office is scheduled for the fall.

– Dan Rafter

The Buzza Lofts lit up at night.

The Buzza building in the Uptown neighborhood of Minneapolis has had an interesting history, serving as the former home of such tenants as the U.S. Military, Minneapolis Public Schools and greeting card company Craftacres. Now, thanks to apartment developer Dominium, this historic building is poised for an interesting future, too.

Relying on both federal and state historic tax credits, Dominium transformed the building into the Buzza Lofts, a 136-unit affordable multi-family development. And the transformation has been a success. The lofts were 100-percent leased within 30 days of their Nov. 1, 2012, opening.

The Buzza Lofts are also an example of how tax credits can make a project a reality.

Chris Barnes, vice president and project partner for Dominium, said that without the combination of federal historic tax credits, Minnesota state historic tax credits and federal low-income housing tax credits, the Buzza Lofts would never have opened.

“The tax credits were critical,” Barnes said. “That is so often what makes or breaks a project. Those tax credits made the difference in getting the deal done.”

The Buzza Lofts project received $5 million each from the federal historic tax credit and the state historic tax credit. It received an additional $10 million from the low-income housing tax credit.

The tax credits have allowed Dominium to charge monthly rents at the property at an average of $1 a square foot. That makes the Buzza Lofts an affordable option in a part of Minneapolis in which monthly apartment rents average $2 a square foot.

“We are an affordable housing development in an area that is an expensive place in which to live,” Barnes said. “When you offer quality space at the rents we were charging, you’d expect to be full with a waiting list. That is what happened.”

Buzza Lofts offers a community room, fitness center and business hub to its residents.

Turning the building into a modern loft-living space was no easy task. The Buzza building, after all, was built in 1907. The challenge for Dominium lied in keeping the charm of the historic building while providing residents with the modern amenities they required.

Dominium had to negotiate with state and federal agencies before making any changes to the building. And the company was working on a tight schedule; the sooner the Buzza Lofts opened, the sooner its revenue stream would start flowing. Because of this, Dominium challenged its contractors to finish construction in 11 months.

That happened. Actually, as Barnes says, construction wrapped up ahead of schedule, in about 10-and-a-half months.

“Historic projects tend to be challenging,” Barnes said. “You are always trying to honor the original use of a building while making it functional for current users. There are always negotiations at the federal and state level. But it is only a challenge, not a fight. It’s about finding that balance. It requires a lot of dialogue back and forth.”

– Dan Rafter

Want to buy a home? You can find a great deal in Detroit.

Is there any debate older than the buying-vs.-renting argument? Maybe not, but that didn’t stop Forbes — the magazine that loves its lists — from wading into this long-running battle. Forbes recently listed the top 10 U.S. cities where it makes more sense to buy a home, financially, than it does to rent an apartment.

Forbes worked with real estate Web site Trulia to track housing data for the 100 most-populated Metropolitan Statistical Areas and Metropolitan Divisions in the United States. Trulia determined a ratio of asking prices of homes for sale versus asking prices of rental homes.

The result of this? Detroit ranked as the best city in the United States in which it makes more sense to buy than to rent. Another Midwest city, Dayton, Ohio, came in third. The Warren-Troy-Farmington Hills area of Michigan came in fourth on Forbes’ list, while Toledo, Ohio, ranked fifth.

Grand Rapids, Mich., earned the sixth spot on Forbes’ list while Cleveland nabbed the seventh. Gary, Ind., came in ninth. Memphis, Tenn., nabbed the 10th spot. If you’re keeping track, Midwest cities accounted for nine out of 10 spots on the list, with only Atlanta breaking this streak.

The takeaway? If you’re living in the Midwest, you might consider the financial wisdom of buying a home instead of renting.

– Dan Rafter