Designing office spaces to attract top talent

By Dan Earles
Principal, Earles Architects and Associates

Chicago’s downtown office market has seen significant changes in recent years, from the influx of companies moving downtown to the ongoing construction boom in Class-A office space. In this environment, many landlords and tenants are continuing to look for creative ways to define their spaces and attract the best office talent.

Among the key trends that will shape the Chicago office market in 2017 are a heightened focus on flexible workplace designs; more balance in open-space planning; and an “amenities race” as building owners compete for tenants. Office tenants also are looking for designs that help bring the outdoors in and create a comfortable, “home-like” setting.

From the tenant perspective, flexible workplace designs have become an important tool for attracting and retaining top talent. This is particularly true for the Millennial workforce, as these workers have come to expect features such as touchdown stations, office-wide Wi-Fi, flexible work hours and multi-function spaces that can be easily converted for various uses. The overarching goal is to create a work environment that draws employees in and helps motivate and engage them.

Many tenants are introducing alternative desk arrangements and work environments that give employees an extra edge in shaping their work flow. Some of these options — such as sit-stand desks, exercise balls used as chairs and flexible stools for alternative seating — add a layer of ergonomics and fitness to the mix.

All these features are not lost on landlords, who are continually searching for ways to differentiate their spaces and spruce up their amenities packages. From revamped common areas with stylish furniture groupings to fitness centers and trendy food service offerings, many landlords are competing in an “amenities race” to draw tenants to their buildings.

This is particularly true in older office buildings that are being repositioned to compete in today’s office leasing environment. Among the novel amenities touted by landlords are sophisticated shoeshine areas, shared conference centers, bicycle storage areas, concierge services and Wi-Fi lounges for touching down outside of the main office space.

Another growing trend is the focus on bringing the outdoors in. Floor plans that keep the office perimeter window line as clear as possible and include glass-front offices help maximize the use of natural light. Many tenants also incorporate plants and living walls to add an authentic natural environment. Furniture with earth-toned upholstery and related patterns and textures help finish off the space. When natural light is at a minimum, television screens, wall coverings and natural murals can help create a sense of openness.

These space trends are taking place amidst the backdrop of collaborative space planning, which continues to shift to meet tenants’ needs. While large, collaborative spaces might work well for creative companies, they can be distracting and noisy for legal, financial services and related firms. The solutions for many companies is a floor plan that balances the need for open work areas with the practical benefits of adding several private spaces for more concentrated work and privacy.

This can be achieved with furniture groupings that define space and create subtle separation, for example. Another option is to include partial walls, including those made of glass, to define areas without closing off too much space. Overall, offices with spaces for different uses are ideal, as this allows employees to have flexibility. These options could include huddle rooms for impromptu meetings and phone rooms.

These trends can be incorporated with an underlying “home-like” feel. After all, workers spend most of their waking hours at work. Why not bridge the gap between work and home with comfy, residential style furniture and flexible places to sit? The space could be designed with pops of color, accent walls, carpeting with subtle pops of color and a variety of patterns and textures.

Refreshment areas, in the form of personalized break rooms and coffee bars/service areas, often near meeting spaces, are also a trend with many tenants. These spaces are convenient for employees, help promote employee bonding and are used near conference and meeting areas to welcome clients.

As office space continues to evolve this year, expect to see more of these trends as companies look to nurture employee relationships, improve productivity and develop a strong collaborative culture.

Dan Earles is principal at the Chicago office of architecture firm Earles Architects and Associates.

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New life: Transforming outdated office buildings into apartment towers, high-end retail

by Sara Freund

Oriental Theater at 32 W. Randolph St. in Chicago

A flurry of new development is hitting the Chicago office market, with much of it focused on turning outdated Class-C buildings into apartments, hotels, retail and student housing.

Developers are on pace to complete nearly 3 million square feet of office space in the Chicago market, the majority of which is slated for the city. This will top last year’s high of 2.9 million square feet, according to a report from Marcus & Millichap. The area west of the river is particularly active with a 54-story office tower at 444 W. Lake St. that totals 1.2 million square feet. Employment rates are also up 1.5 percent, with roughly 27,000 of those jobs based in office spaces.

The new, top-shelf office space available is pushing along a flight to quality, said Avison Young tenant rep Mark Robbins. Tenants who can afford it and whose images depend on it, move into trophy office towers, leaving space for others to upgrade. As an example of this, Robbins noted DLA Piper’s move to River Point at 444 W. Lake St. from an office at 203 N. LaSalle which they had been at for about 30 years.

“All the new product creates shadow space. All of a sudden, owners of buildings that are 12 years old are motivated to find tenants,” Robbins said.

Inevitably, that puts some vintage office spaces at the bottom of the food chain. While they might not be attractive office spaces anymore, they are ideal for retail or apartment conversions. Now developers have a captive audience and are able to push redevelopment of these spaces.

An example of this can be seen at The National building at 125 S. Clark St., Robbins said. Revival Food Hall opened last August in the building, which previously served as headquarters for Chicago Public Schools. The old office was revamped into a 24,000-square-foot space that now boasts 15 fast-casual food stalls plus a coffee and cocktail bar.

Revival Food Hall at 125 S. Clark St. in Chicago

The conversions are partly fueled by large corporations making moves from the suburbs into the city, according to John Slivka, who works in the investment properties group at CBRE.

“Much of it is related to the younger workforce. They want to be in the city. That’s driving demand for these vintage buildings. People want to live where they work,” Slivka said.

Several transactions that Slivka brokered were turned from outdated office building into apartments, retail and hotels.

Slivka was involved with the former Brock & Rankin building at 619 S. LaSalle that was transformed into Library Lofts, a 106-unit apartment building, by Marc Realty Residential. The South Loop building offers tenants a modern fitness center, an outdoor deck with lounge chairs and grills, a club room for entertaining and a bike room.

Another notable property Slivka worked on was the redevelopment of the Oriental Theater building at 32 West Randolph by the Murphy Development Group. The 237,200-square-foot office space above the theater was converted into a 199-room Cambria suites hotel and is expected to open later this year.

Chicago is shifting into an environment that also reflects the wants of younger employees and students. The 17-story Arc at Old Colony developed by CA Student Living was a 124-year-old office tower at 37 W. Van Buren that is now 137 furnished apartments. College students get access to a 24-hour fitness center, a communal and individual study rooms with free printing, a rooftop lounge with a fire pit and gas grills, coffee vending machines and a dry-cleaning service. Some units even come with a 50-inch flat screen TV, in-unit washer and dryer and modern furniture.

A furnished apartment at Arc at Old Colony at 37 W. Van Buren in Chicago

The Gibbons and Stegar buildings, some of the oldest in the Loop, at 20 and 28 E. Jackson Blvd., were also developed by CA Student Living. In 2014 the company opened Infinite Chicago with 124 apartments with luxury, student-focused amenities similar to those at Arc at Old Colony.

The office market is vibrant and looking to the future, Slivka predicts strong fundamentals As the culture of live-work-play grows, so will the activity.

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Staying Full: Tenant advocates help users and keep markets strong

David Liebman

By David Liebman, SIOR, JD, LEED Green Associate

Last year was a banner year for Chicago industrial real estate properties, and the trend is continuing this year. Ecommerce companies are zeroing in on central locations to help them reach large portions of the U.S. population in ever-shorter delivery periods. Developers are keeping new construction at measured and smart levels.  The end result: vacancies are at a 15-year low.

New tenants and buyers are continuing to seek out well-located and efficiently priced space throughout the region, while developers are seizing opportunities to build new spaces for these tenants whenever and wherever possible.

Overall, many of Chicago’s industrial submarkets are performing well, with third-quarter vacancy rates at 6.5 percent to 6.75 percent throughout the Chicago industrial markets. That’s lower by 25 basis points than in the first quarter of 2016 and by 50 to 75 basis points over the third quarter of 2015.

The markets that are performing the best, however, are those with the best strategic locations—namely, O’Hare, Central DuPage and Northwest Indiana.  The O’Hare submarket is a behemoth with more than 140 million square feet and just 5.75 million square feet still on the market.   End users like the O’Hare submarket not only for its proximity to the airport, but also because it is at the confluence of several major interstate highways.

Submarkets that are farther from the urban hub, including north suburban Lake County (7.5 million square feet available), far northwest suburban McHenry County (3.7 million square feet available) and the Elgin/I-90 corridor (3.3 million square feet available) are still competing at early 2000s, pre-recession levels, even if they are not quite as tight as closer-in markets.

And while there is plenty of new construction throughout the Chicago region, much of it is either built-to-suit or, if speculative,  leased relatively quickly after it is built. This put absorption rates at record levels during the third quarter of 2016, the highest absorption levels since 2007.  That’s especially impressive given the fact that more space had come on the market that year than in years past.

Buildings come in all different shapes and sizes, but those over 500,000 square feet are the hardest to come by in the Chicago metro area. Because less space is available than there has been in many years, tenant advocates who know the market are the best bet to help end-users who are new to the Chicago market when they are negotiating for their leases.

With space constrained and prices increasing accordingly, these advocates can help tenants assess the value of available properties, as well as put the terms and pricing in perspective to meet their clients’ expectations. By working with a tenant advocate, end users can find a realistic and achievable solution that meets their real estate needs and goals, even in a landlord-favored marketplace. This can mean finding an older building with lower rent for companies that don’t need higher ceilings, or targeting a larger building farther from the urban core for companies that are distributing to locations beyond the Chicago area.

Even though there may not be spaces available for all requirements, there are a variety of building types, sizes and constructions still on the market for the tenant who is willing to search.  In many submarkets there are more available masonry and pre-engineered steel properties than pre-cast panel construction properties, but there are also many speculative projects currently underway.

Different submarkets might be appropriate for different tenants. Finding a 100,000- to 125,000-square-foot space in a submarket with smaller buildings or multi-tenant buildings will be easier than it might be in a submarket of mostly new construction, for example. Some tenants are less fazed than others by older buildings—working with a tenant advocate will help these tenants know that the building they select is most appropriate for their needs. A tenant advocate’s expertise can save buyers money in both the short-term, as they’re selecting a building to lease, but also in the long-term, where the tenant will occupy a building that’s functionally efficient and cost-effective for the duration of a lease.

A tenant advocate assists the occupier to identify the real going rates and acceptable terms for the building a tenant is seeking in its selected submarket. Some submarkets still offer concessions or incentives, and tenant advocates know which submarkets and landlords might have the best properties to identify. In less strategically located markets, there may be fewer buildings or building types available, but the right advocate will match the tenant with the right submarket.

There’s also a high (and often overlooked) value in the existing relationships that tenant advocates have with landlords and their brokers in the Chicago area.  A tenant advocate will know which brokers are representing the most qualified landlords, and may be able to secure more favorable terms for the tenant in some circumstances.  The Chicago industrial real estate community is tight-knit, and there are many advantages to tenants in leveraging these broker relationships.

So what’s next for the Chicago industrial submarkets, where steady demand and absorption is keeping vacancy rates low? The economy, interest rates, inflation and geo-political matters could definitely affect the industrial marketplace as a whole in the next few years. As ecommerce companies continue to grow, they will want more space in centrally located areas that can reach a high proportion of the population in a matter of hours or one to two days. This bodes well for the Chicago industrial market. The market is currently doing well, and most knowledgeable real estate professionals remain cautiously optimistic  that we won’t see  a slow-down for several years.  The catchphrase for now is: enjoy the Chicago industrial real estate market for as long as possible!

David Liebman is managing broker at Chicago’s Merit Partners, LLC. Liebman leverages his legal background that encompasses commercial real estate and corporate law in providing prudent, trusted advice in all matters relating to transactions.

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Construction outlook: More cranes in the sky, but labor shortages and rising costs await, too

Leopardo recently completed a 128,000-square-foot phased renovation and expansion of Grubhub’s Chicago headquarters in the Burnham Center at 111 W. Washington St. in Chicago.

by Dan Rafter

When Paul Laird looks at the Midwest markets he serves as vice president and Midwest regional manager for United Construction Company, he sees a busy future. Construction crews are busy across the Midwest today, building spec industrial facilities, downtown apartment towers and new office buildings.

And Laird doesn’t expect the pace of new construction to slow anytime soon, thanks to a steady national economy and an equally steady demand for new urban apartment buildings and modern warehouses and distribution centers.

“Our crystal ball doesn’t go out into 2018, but we don’t see anything right now that should slow the pace of construction activity,” Laird said. “The construction industry sort of lags behind everything else. It stops slower than the rest of the economy. And it usually starts back up slower. There is nothing that would indicate that 2018 would be a down year when it comes to construction.”

Spec building on the rise 

Construction activity is solid, or at least steady, across the major commercial sectors. But Laird said that the industrial market is especially strong today.

Much of the demand for new warehouse and distribution facilities is being driven by e-commerce users, Laird said.

This include a rising demand for spec industrial facilities. And these modern buildings need certain features that were once considered high-end but are now becoming requirements, everything from plentiful truck parking to 36-foot ceiling heights to LED lighting.

“Developers are starting to change their standards,” Laird said. “They are using LED lighting as a marketing tool for possible tenants. We are putting LED lighting in more buildings upfront now. Then there are the increasing ceiling heights. A lot of the amenities that we are putting into industrial buildings today are being driven by the needs of e-commerce clients.”

There’s another commercial sector that is keeping construction crews busy: seniors housing.

Laird said that United Construction Company is working on plenty of assisted-living facilities. There’s an obvious reason for this: The country’s population continues to age. And today’s seniors – and their families – want assisted-living facilities that are modern, clean and filled with the type of amenities you’d find in a high-end condo or apartment community.

“That market has really picked up,” Laird said. “I don’t have a clear sense of how long a run that market will have. But obviously, there is real demand out there with the aging population. Today, that market is very strong. We feel that it will be strong throughout 2017.”

Mark Yanik, vice president of corporate development and strategic planning with Hoffman Estates, Illinois-based construction firm Leopardo, said that the amount of construction activity today is particularly impressive when you consider the challenges that the industry faces.

Leopardo is active in Illinois and the Chicago area. And both the state of Illinois and city of Chicago face severe budget problems while being plagued by governmental in-fighting. The state of Illinois hasn’t even managed to pass a budget.

But this hasn’t stopped developers from building throughout the city. That, Yanik says, is a testament to the impressive demand for new construction in this key Midwest market.

“Chicago does have one key advantage: We have a diversified economy,” Yanik said. “If you look at a city like Detroit, it is focused more on the rust belt industries. When manufacturing slowed down, they took it hard. Chicago is more diversified. One of the big booms we are seeing now is driven by the tech industry. We are building out warehouse space for ecommerce users. The big boom in the tech industry is hitting Chicago pretty hard.”

Yanik is especially excited about the positive impact the tech industry can have in Chicago and other Midwest markets. After all, ecommerce users need distribution centers in the Midwest to ship their products to customers as quickly as possible.

This is making the Midwest, and its major cities, a more important player in the tech industry than in the past.

“If you look historically at the tech industry, it has been really concentrated in a handful of central hubs,” Yanik said. “But now a lot of cities not traditionally known for tech are getting attention. Chicago is getting a lot of growth from that. Google is here. GrubHub is here and expanding. A handful of other big tech names are here. That is creating a lot of activity. But the tech companies are creating and leading a lot of growth in other areas, too, such as multifamily and retail.”

Meeting the challenges 

Even though construction activity remains high, this doesn’t mean that the industry isn’t facing its own challenges.

For one thing, labor costs continue to rise across the Midwest. Laird said that this is yearly challenge for construction companies, especially those working in markets with strong unions. Labor costs tend to rise each year, after all.

“Those increases are baked in year after year,” Laird said. “We are accustomed to that. There is not great shock factor to that.”

However, there is one source of rising costs that does come with more uncertainty, the cost of materials. Laird said that this year the price of concrete continues to rise. This, of course, will impact the final costs of construction projects.

Laird said that this year the price of a typical spec warehouse project is up about 3 percent to 4 percent from where it stood in 2016.

“That’s not overly significant, but it is a pretty decent increase,” Laird said.

Laird said that the increased price of concrete is offset a bit by the fact that the costs of other materials is holding steady. Laird pointed to steel: The cost of this key material has been relatively flat, preventing an even bigger average increase in the cost of completing a job.

“Most of the metals have been in check,” Laird said. “That’s a big help. It keeps everything in line. If those prices, though, start to trend upward in addition to the costs of concrete we will start to see much more significant increases. Now there are no indications that this is going to happen.”

Yanik said that rising building costs are always weighing on construction-industry pros.

“I can’t talk to a client or speak at an event without construction costs coming up,” he said. “Construction costs are rising. You can’t deny that.”

But rising costs aren’t the only challenge that construction companies face. It’s also getting more challenging for construction companies to find the skilled labor they need on their projects.

Yanik said that when the economy went into its downturn starting in 2008, many construction workers left the building trades. When the construction industry started to rebound in 2012, it faced a problem: Many of the industry’s skilled workers had retired during the Great Recession. Others left for different industries.

Add to that the fact that many view the construction industry as a stodgy, conservative business. That makes it less attractive to the young workers that the industry needs, Yanik said.

“Not enough new people are coming into the market,” he said.

Yanik said that Leopardo is fighting this trend by doing everything it can to dispel the myth that construction has to be stodgy and boring. He said that the company is following the path of tech companies by building a workplace culture that is attractive to the next generation of laborers, project managers and leaders.

“The lifestyle and the office culture we can create can make a difference,” Yanik said. “We invest in opportunities for our employees to learn and develop. Millennials want growth and development opportunities. You can retain them if you give them the opportunity to learn and grow. So we are heavily focused on letting them grow professionally.”

In addition to providing plenty of opportunities to rise through the company’s ranks, Leopardo officials have also created work environments that are more attractive to younger workers, Yanik said. Leopardo offers free food in its onsite kitchens. It holds social events, such as renting out movie theaters to screen movies for its employees and their families. Masseuses regularly visit both of Leopardo’s Chicago-area offices.

“We try to foster a team environment,” Yanik said. “We want to be a place that you want to work at.”

Yanik says these efforts have paid off, with an increase in the number of fresh-out-of-college or other young workers at Leopardo.

Posted in Chicago Commercial Real Estate, Detroit commercial real estate, healthcare, Illinois, Illinois real estate, industrial real estate, Michigan commercial real estate, multi-family, office, retail, senior care facilities, shopping centers | Tagged , , , , | Leave a comment

More good times in Omaha: Commercial real estate market showing no signs of a slowdown in 2017

A rendering of the Avenue One project in Omaha.

by Dan Rafter

Busy. Active. Strong. Steady.

These are four of the words that consistently pop up when commercial real estate pros talk about Omaha and its commercial real estate market.

These words shouldn’t come as a surprise to anyone familiar with this market. Omaha has long been a model of steady growth when it comes to commercial sales, leases and development. This holds across all the major commercial sectors, office, retail, industrial, healthcare and, of course, multifamily.

Just listen to David Levy, a partner with Omaha law firm Baird Holm.

“The market seems strong today,” Levy said. “The commercial real estate market is busy. We continue to see a steady volume of deals. Our downtown area continues to be strong, and we are continuing to see activity in all sectors.”

That’s a good summary of the Omaha CRE market in 2017: steady, strong and full of momentum.

Tim Kerrigan, vice president of Investors Realty, agreed that Omaha’s commercial real estate market is an active one, saying that it is keeping brokers with his company busy.

“Our clients have a lot of oars in the water and plans in their heads,” Kerrigan said. “A lot of land is selling right now at high prices. Land that I have listed I am receiving a good number of inquiries on.”

All sectors active

Omaha’s industrial sector is especially strong today. Levy said that demand for industrial space is so high that it’s become difficult for users and developers to find land for new industrial facilities.

“It’s not always easy to find that 40-acre or 20-acre tract of land,” Levy said. “Others might be looking for something smaller, maybe a 5-acre site that is an industrial-appropriate one. That’s not easy to find, either.”

And while industrial is booming here, the other commercial sectors are more than holding their own. Levy pointed to the city’s retail market as an example.

As in all metropolitan areas, Omaha boasts pockets where retail activity is brisk and other pockets where it is more sluggish. But overall, the retail sector in Omaha is seeing more activity today.

Levy said that mixed-use districts are doing especially well in the city, the combination of retail, office and multifamily in a single development bringing in a wide range of shoppers, workers and residents.

“Mixed-use retail areas tend to have an advantage here,” Levy said. “They do really well if they are paired with places to eat and obtain personal services.”

One of Omaha’s strongest mixed-use areas is the Capital District in downtown Omaha, Levy said. The district, which developers are referring to as a new heart for downtown Omaha, will include a 333-room, full-service Marriott Hotel, 25,000 square feet of office space, 218 high-end apartments and 90,000 square feet of entertainment retail.

Then there’s the latest good news for Omaha: the Avenue One mixed-use development. This $1.2 billion development will be located south of 192nd Street and Dodge, and will bring even more new retail, office and residential offerings to the market.

“The approval of this project will be tremendous news for Omaha,” said Curt Hofer, chief executive officer of Jasper Stone Partners, one of the lead investors of Avenue One, in a written statement. “The jobs and economic activity resulting from this development will benefit the entire metro area. It is especially encouraging that Avenue One is now moving forward after acquiring the first piece of property over 13 years ago. We are eager to bring these benefits to the Omaha community.”

Jasper Stone Partners has hired Block Construction Services to oversee the project.

The Avenue One project will be one of the largest of its kind in Omaha, and is expected to have an annual economic impact of more than $1 billion according to research presented to the State of Nebraska for ranking state-directed highway improvement projects that can have the greatest positive economic impact.

Construction of the development is anticipated to create more than 8,500 jobs and the completed development is expected to generate more 8,900 permanent jobs.

Avenue One will transform about 200 acres of farm ground or an area that equals almost 50 city square blocks into new restaurants, shops, residences and offices across an interconnected, pedestrian-friendly area.

The project will feature office, retail, residential, hotel and civic spaces. With more than 7 acres of dedicated public plaza area, 26 acres of green space/ park and more than 6 miles of walking and biking trails Avenue One will be a walkable environment and feature a trail crossing and major investment in Youngman’s Park.

The project will consist of 1.3 million square feet of office and retail space and more than 2,000 residential units. Ground-breaking is set for mid to late 2017.

Kerrigan said that the office market in Omaha and its suburbs remains steady, especially for the right type of space.

“In terms of office space, if it’s good space and priced right, it will lease quickly,” he said.

Adam Marek, vice president with the Omaha office of Colliers International, said that office users who are looking for Class-A space in the Omaha market have limited options. And those Class-A users looking for large amounts of space might have to move into new construction, as the market for quality, Class-A office space remains tight, Marek said.

The same can be said of companies that have several locations in the market. If these companies want to consolidate their operations into one office facility, they might have little choice but to move into space built specifically for them.

“Our vacancy rate is low enough that for you to get what you want, it might have to be created for you,” Marek said. “If you are a company of a certain size or you have narrow geographic parameters in which you can relocate, you will be limited by that low vacancy rate.”

The tight office market is good news for Omaha, of course. It means that the city’s economy is strong and that plenty of companies want to do business from it.

But, as Marek points out, the tight office market is also the source of challenges for businesses.

“The market today requires a longer view,” Marek said. “If you are a Class-A office tenant and you want to relocate, it is might not be a six-month process. It might be a 24-month process. You might be moving into a building that doesn’t exist today.”

Busy times downtown

What’s behind the steady office market here, especially in the central areas of the city? Kerrigan points to the economic conditions of Omaha itself. The unemployment rate remains low here. At the same time, developers never overbuilt in the office market, keeping demand for available office space high.

“The stable market economics for sure help,” Kerrigan said. “But when it comes to office, there are a limited number of preferred locations. We are careful not to build too much product. There has been very limited spec construction in office. With a good economy, business is good. Add to that limited choices and cautious new construction, it lends itself to relatively short supply. And that lends itself to lower vacancy rates in the city.”

Commercial real estate professionals working the Omaha market say that the city’s downtown is especially strong today.

That’s largely because downtown, and the city’s Midtown district, have both become places where younger and older renters want to live to experience the conveniences of an urban lifestyle: These renters don’t want to spend their days driving. Instead, they want to walk to public transportation, shops, restaurants and entertainment.

Living in downtown or Midtown Omaha gives these renters that opportunity.

Levy points to Omaha’s Blackstone District as an example. This district, in downtown Omaha, is in the middle of a revitalization period, with smaller-scale commercial, retail and entertainment uses drawing in visitors and residents alike.

Of course, it’s not just downtown that is thriving when it comes to retail and office users. Kerrigan said that the Aksarben Village mixed-use development in Omaha’s Midtown area remains a strong draw for office users, too.

“We do have an interesting story in Omaha in that we have had great success with and have plenty of opportunities remaining in areas that are not in the traditional office markets,” Kerrigan said. “We have several alternative areas, like Aksarben Village, that are appealing to large office users. These large users might have to continue looking for these non-traditional office markets as space gets more difficult for them to find.”

Kerrigan pointed to the sprawling World Communications Park in northwest Omaha as an example. This park is on the edges of town, but it isn’t too far away from amenities. For instance, Sorensen Park Plaza, a 550,000-square-foot retail shopping mall is just one mile of the business park.

Of course, the downtown Omaha office market continues to attract plenty of users, and remains a key spot for those companies looking to attract Millennial workers.

Kerrigan said that downtown Omaha’s office market remains a varied one, one that can accommodate companies and employers of all sizes.

“The downtown office market has long supported large companies, our Fortune 500 and Fortune 1000 companies,” Kerrigan said. “It also supports big banks, law firms and other large companies. But it has also been a good home to smaller, unique companies. That continues to be the case. Employees are more than ever driving the office decisions that companies are making. And these employees often want to work and live in or near the downtown.”

The interior amenities of these office buildings matter to employers, of course. But Kerrigan said that for many companies, the amenities of the surrounding neighborhood are even more important.

Companies increasingly want to set up shop in areas in which their employees can quickly walk to restaurants, bars, shops and public transportation, he said.

“The amenities within the building are secondary to the amenities of the area or the neighborhood,” Kerrigan said. “Companies are looking for entertainment venues near their offices, everything from bars and restaurants to music halls and concert venues and stadiums. When you have those things, you will have all the complementary amenities that come along in terms of service businesses.”

Marek agreed that the most important amenity for officer users today is often the community surrounding their buildings. This doesn’t mean, though, that downtown Omaha has to be the location of choice for office users.

There are plenty of other office submarkets in the Omaha area that offer an urban feel in a suburban location. These areas provide the retail, restaurants and entertainment options that office tenants want, but in a location outside Omaha’s downtown, Marek said.

Marek points to Aksarben Village as an example.

“Technically, that development is not an urban environment,” Marek said. “But it is a city withink a city. It does feature the live/work/play feel. You can still go to work there, go to the movies there and eat at one of the restaurants, all without having to leave the development.”

Omaha’s retail market faces different challenges. Marek said that those retailers who are doing well today will continue to do well, not just in Omaha but across the country. Those retailers who are struggling will continue to downsize. Retailers such as Sears and Kmart are examples of retailers that will probably continue closing locations throughout 2017.

Marek said that in Omaha much of the space that larger retailers have abandoned has either been filled already or in the process of getting filled.

“There has been some right-sizing in the retail market,” Marek said. “The effort will continue to be to backfill and fill in those spaces that have been left empty. Most of those retail spaces that have closed have been backfilled or repurposed.”

More good times ahead?

Levy says that he expects the future to remain bright for Omaha. That’s because the city offers plenty to attract both residents and businesses, he said.

“Land costs relative to other big cities in the Midwest are attractive,” Levy said. “We have a strong and educated workforce. The cost of living is lower than in many places in the Midwest, and certainly lower than on the coasts. Our municipal regulatory process when it comes to land use is easily navigable. All of those things make Omaha an attractive place to invest and do business in.”

This doesn’t mean that Omaha doesn’t face its own challenges. Levy said that public transportation remains a hurdle here. There simply aren’t enough public transportation options for residents in the city or its suburbs.

“We continue to lack and be behind some of our peer competitor cities when it comes to public transportation,” Levy said.

Levy pointed to Kansas City with its recently opened streetcar line as an example of a municipality that has invested more in public transportation than has Omaha.

City officials and Metro Transit Omaha are working together on a possible bus rapid transit line along the city’s main east-west artery, Dodge Street. Levy said there is also growing support for a streetcar line in Omaha, much like the ones operating now in Cincinnati and Kansas City.

“That project has been in the planning phases for a long time,” Levy said. “But the support from the business community and public sector is growing stronger.”

Another challenge? TD Ameritrade Park is a hit during the College World Series, which the park hosts. It is also home to the University of Creighton’s baseball teams.

But much of the year, the park sits empty. Ideally, the Omaha Storm Chases minor league baseball team would play its games in the park, too, keeping it busier. But the Storm Chasers play in their own park in suburban Papillion.

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Finance pros: Multifamily market still booming, overbuilding not yet a concern in Midwest

A joint venture of CA Ventures and Keith Giles LLC is building 1136 South Wabash, a 320-unit mixed-use development in Chicago’s South Loop.

by Dan Rafter

Minneapolis’ Dougherty Mortgage has been busy, fielding plenty of financing requests from investors who want to acquire and developers who want to build apartment complexes in the markets this commercial lender serves.

Dougherty Mortgage isn’t alone, either. The multifamily market continues to boom across the Midwest, with investors sinking their dollars into existing properties and developers rushing to build new apartment towers in urban downtowns.

Tim Larkin, senior vice president in the Minneapolis office of Dougherty Mortgage, says that the apartment market continues to keep him and his fellow lenders active. And he doesn’t see any slowdown in multifamily financing requests in the near future.

“Rents have been rising and will continue to rise. The economy is in good shape. Payroll is up and unemployment is down,” Larkin said. “The country’s median income is up. All of those strong factors are still in place, so there doesn’t seem to be any reason for a slowdown in the multifamily market.”

That is good news for the brokers, developers and investors who continue to flock to this busiest of commercial sectors.

National factors fueling local multifamily markets

Why has the multifamily market been so strong for so long? Larkin points to larger trends within the residential market.

As Larkin points out, the national homeownership rate has fallen in recent years, ever since the housing bust that started in 2007. More consumers chose to rent as housing prices fell. Many of these consumers have continued to choose rental housing over owning.

There is also a lack of single-family homes available on the market. This lack of inventory is forcing some consumers who might have chosen to own into renting.

“The Millennials are out there renting for longer periods of time,” Larkin said. “We didn’t anticipate that or expect that. But that has been the case, and it’s provided a boost to the multifamily market. At the same time, Baby Boomers are downsizing. Their kids are out of the house. Many of them are turning to renting, too. They can be a little more mobile when they’re renting instead of owning. So on the demand side, the fundaments are strong for renting.”

Frank Lutz, senior vice president with Berkadia, said that apartments play an important role in the United States housing market. Lutz says that the country needs a greater amount of affordable places for its residents to live.

Rental housing often fills that need. It’s true that much of the new apartment product being built today qualifies as luxury housing, rentals that are too costly for median-income renters to afford. But Lutz said that much of the existing apartment stock throughout the country, the Class-B and Class-C buildings, are far less expensive, and offer consumers a more affordable alternative to owning a home.

“The less expensive apartments really are the bulk of the product out there today,” Lutz said. “There is a tremendous need for affordable housing in America. I think that is why the multifamily market has remained as strong as it has.”

These strong fundamentals are why neither Larkin nor Lutz are overly worried that developers are building too many apartment buildings, especially in Midwest markets.

Larkin said that there might be some overbuilding in markets such as Boston, Los Angeles, New York City or Washington, D.C. But in the Midwest, even in such hot apartment markets as Chicago and Minneapolis, supply has kept pace with demand, Larkin said.

Larkin points to his home market of Minneapolis-St. Paul. He said that the apartment vacancy rates here average about 3 percent to 3.5 percent. Those are low rates, and an indication that the supply is not outpacing demand in the Twin Cities.

“I’m not worried about the Midwest at this time,” he said. “You do have to be careful and keep a close watch on some of the hotter markets across the country. In the Midwest, I’m not concerned yet. There’d have to be something really big to throw a monkey wrench or cause problems, in my opinion. And I don’t see anything that big on the horizon.”

Lutz said that apartment overbuilding so far has not materialized.

“There are some pockets around the country where there might be a little bit of softness,” Lutz said. “But to be honest, I don’t feel that it is of any particularly strong threat to the business. Demand for rental housing remains very strong. The long-term fundamentals for multifamily housing and the demand for multifamily housing remains strong.”

Lenders are cautious today, too, before loaning investors and developers acquisition or construction financing, Lutz said. That is preventing developers from oversaturating markets with apartment units, he said.

“I think underwriting standards, unlike the last time we got into trouble in this business, remain reasonable,” Lutz said. “I don’t want to say they are conservative. But they are reasonable. The long-term demand outlook for rental housing in America looks very good.”

Loan approval

What do investors and developers have to show companies such as Berkadia and Dougherty to gain approval of their financing requests?

Larkin said that Dougherty lenders take a long look at the previous experience of a loan request’s sponsor or key principal.

“What is their track record in developing, owning or managing the product type that they are looking to get financing for?” Larkin asked. “We will ask more questions if it’s something they’ve never done before.”

Dougherty also studies the financial capacity of sponsors. If a problem pops up, will the sponsor have the financial ability to resolve the issue?

For a new-construction project, Dougherty lenders study the members of the project team. Who is the architect? Who is the general contractor? The people working on a project matter, Larkin said.

“It’s all about putting the pieces together,” he said. “We put a lot of work, time and effort into the credit side of things. Lenders do that. They have to.”

Dougherty lenders look carefully, too, at the project itself. If an investor seeks funds to acquire an existing building, Dougherty will consider how well the property is doing and where its vacancy rate stands.

“Is there a positive or negative trend in terms of operations?” Dougherty said. “If it’s a negative one, we will ask more questions. You have to be able to answer them, to get back to us with an appropriate response. Otherwise, we might pass on the deal. Our staff and underwriters do that work. They look at the feasibility of the entire project.”

Lutz said that it’s important for lenders to consider the particular market that a developer or investor is targeting, Lutz said. That’s because a sponsor who has thrived with apartments in St. Louis might falter when moving to a new market such as Indianapolis or Chicago.

“You might have a guy who is a terrific owner of multifamily products, a star in, say, Philadelphia,” Lutz said. “But if he shows up with plans for an 800-unit complex in Indianapolis, we might be hesitant. We might like him for an 80-unit deal in Philadelphia. But we might not like him as much with an 800-unit deal in Indianapolis.”

Posted in Chicago Commercial Real Estate, Illinois, Illinois real estate, Indiana commercial real estate, Indianapolis commercial real estate, Minneapolis commercial real estate, Minnesota real estate, multi-family, St. Paul commercial real estate | Tagged , , , , , | Leave a comment

Veteran CRE pro: Milwaukee has a good story to tell

Construction is now taking place on the $524 million BMO Harris Bradley Center, a downtown athletic stadium that will serve as the new home of the NBA’s Milwaukee Bucks.

by Dan Rafter

Two of the biggest construction projects in Milwaukee’s history are now underway at the same time. To little surprise, this is providing a boost to the city’s economy and commercial real estate market.

Construction is now taking place on the $524 million BMO Harris Bradley Center, a downtown athletic stadium that will serve as the new home of the NBA’s Milwaukee Bucks. The arena is expected to be ready by the fall of 2018.

Also rising downtown is the new $450 million, 32-story office tower that will serve as the new Milwaukee headquarters for Northwestern Mutual. This building is scheduled for completion by the end of this year.

For Stu Wangard, chairman, chief executive officer and founder of Milwaukee’s Wangard Partners, these two projects – coupled with other development in the city – are more evidence that his city is in the middle of a commercial real estate boom period.

“Milwaukee has a good story to tell right now,” Wangard said.

Wangard said that the Northwestern Mutual and Bradley Center projects aren’t just transforming the blocks on which they are rising. They are encouraging additional construction projects throughout the city.

This isn’t surprising. Both projects are major ones that promise to provide a significant jolt to the Milwaukee economy.

An entertainment center in downtown

The BMO Harris Bradley Center is a good example. Yes, the arena will provide a modern new home for the Bucks. But it is also the center of an entire entertainment district that will include new office, retail and apartment offerings.

And Northwestern Mutual Life Insurance Co. in addition to its new office tower headquarters is developing a $100 million high-end apartment tower downtown. This project will include retail and a parking garage.

“When you see large infrastructure projects such as this take place, there is an economic burst that typically follows their completion,” Wangard said. “We are seeing a burst right now, and there should be another burst right after the projects are done. There is a world of difference with something that has been announced and planned and something that is actually done. Once it’s done, it is something that people can rely on.”

A downtown boom

Wangard said that Milwaukee is no different than other major cities across the Midwest. The city is seeing an influx of residents who want to live the urban experience in the center of the city.

These residents want to live in downtown apartment buildings close to public transportation, shops, restaurants, bars and their jobs.

“We are seeing people continuing to move in from rural areas and smaller towns into the major urban centers,” Wangard said. “That has been accelerating the last couple of years. So more companies want to set up locations in the center of the city. They want to attract the talented people within the Millennial demographic.”

Wangard said that all of the commercial sectors in Milwaukee are on the rise today, except for office, which Wangard said is “well in balance right now.”

The hottest market today in Milwaukee, though, might be industrial, Wangard said. He points to the shift in the way people are buying products. Traditional brick-and-mortar retailers are downsizing and closing stores. They are now pushing their online storefronts, as more consumers flock to the convenience of ordering products from their computer screens.

The companies behind these Web sites need distribution centers and warehouses in more markets so that they can ship their products in fewer days to their customers. This has provided a boost to the industrial market as Midwest cities like Milwaukee become important shipping hubs.

“The purchasing power is shifting more to the direct consumer approach,” Wangard said. “That is changing the way products are shipped throughout the whole metropolitan area.”

A shifting retail market

Wangard said that Milwaukee’s retail market is seeing a bit of a rebirth. But it is a changing market.

The Milwaukee retail market is moving from large traditional department stores to smaller specialty stores, he said. Service businesses are on the rise, too, everything from fitness clubs to nail salons.

The retailers that are thriving? Those that are offering products and services that customers can’t simply order from a Web page.

“It’s obvious who the winners are and those who are going through downsizing,” Wangard said. “In each category, there is a winner. Those dominant winners are adding square footage at the right spot and the right size.”

The office market in Milwaukee might not be booming. But it is certainly steady, according to research from CBRE. The company found that Milwaukee ranked in the top 15 markets across the country in 2016 when it came to the amount of office space absorbed.

 

CBRE found that the Milwaukee-area office market saw more than 1.1 million square feet of absorption in 2016. That came out to 2.6 percent of the office market’s net rentable area in Milwaukee. That figure ranked 11th in the country last year.

Marcus & Millichap reported that 2017 will be a busy year for the Milwaukee-area office market. The company said that office deliveries are set to reach a record high this year with 1.4 million square feet of new office space added to the market. Last year, 757,000 square feet of office space was built, according to Marcus & Millichap.

This new construction will add to the area’s office vacancy rate, pushing it up to 13.8 percent in 2017, according to Marcus & Millichap.

Demand still strong for multifamily

There is concern in some major metropolitan markets that developers are building too many apartment buildings.

But Wangard said that the Milwaukee-area apartment market is still in balance.

“Supply is still ahead of demand,” he said. “There is still strong demand for multifamily housing.”

There are some changes in the multifamily market, though. Wangard said that there is more rollover in the apartment market today than there was two, three or five years ago. A greater number of renters are leaving apartments and now buying single-family homes.

But the good news for apartment developers and owners? Wangard said that there is still plenty of demand to fill in the units that renters are leaving behind.

What amenities are Milwaukee renters looking for today from their apartment spaces? Wangard said that all multifamily buildings must have the most robust wi-fi service possible. Renters in the Milwaukee area also want concierge-type services. Many renters expect their apartment buildings to boast large clubhouses and pools.

There is also a rising demand for quiet spots in clubhouse areas in which renters can work on their laptops. It’s why Wangard often builds business offices within their apartment building clubhouses.

“More people are working out of their apartments,” Wangard said. “Their apartments are doubling as their offices. And sometimes they need a space to get away from the apartment. They need those quiet spaces in the common areas to work.”

When it comes to the units themselves, the quality of construction is key, Wangard said. Renters want high-end appliances and countertops. They also want plenty of natural light and apartments that filter out the noise from outside.

As Wangard watches the big Northwestern Mutual and arena projects move through the construction process, he predicts that the busy times in Milwaukee are not about to slow any time soon.

“Milwaukee can be a tougher market to bring people to. But once people are here, they love it,” he said. “You get short commutes. There’s a friendly atmosphere. It’s a great area for families and for young people. Milwaukee is a great value, a great place to live. A lot of people don’t know what a wonderful lifestyle they can have in Milwaukee.”

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