Why the Suburban Risk Is Worth It
Like love (and star-nosed moles), yield is blind. And investors are willing to overlook the Chicago suburbs' aging demographics, sluggish leasing demand, and general uncoolness for the right turnaround play.
200 of you joined us last week at Bisnow’s State of the Suburbs, held at the Westin Lombard Yorktown Center, where our panel of top suburban scions sounded off. With downtown’s current office frenzy and rising occupancy costs, our panelists anticipate a welcome ripple effect sending demand to the less-expensive ‘burbs. But aren’t all the Millennials in the city, you ask? That might change with the new affordable housing ordinance the City is pushing, which could create a stoppage of new supply and push rents to NYC and San Francisco levels and send Millennials back to the ‘burbs, they say.
Hamilton Partners partner Mike Rolfs’ (above right, with Stahelin Properties' Mark Wilson) most recent suburban success: The sale of 500k SF Riverwalk I and II in Buffalo Grove to Accesso Partners. It wasn’t easy after Allstate vacated close to 400k SF in ’08, but Hamilton leased the second building to CVS Caremark and PrimeSource Healthcare and the property is now up to 96% occupied. Mike's happy to see the 'burbs finally allowing TOD projects and adding multifamily to the mix. On a macro level, though, the state needs an economic attitude adjustment. We might have the infrastructure and employee base, but we’re losing companies to our pro business and incentive-happy neighbors like Wisconsin, Indiana, and Michigan, he says.
White Oak Realty Partners has been dominating the list of top suburban repositionings with its sale of Central Park of Lisle to Blackstone last year and the sale of Columbia Centre in Rosemont to Adventus Realty Trust. Managing principal Rick Blum (above left, with Power Construction's Chris Goray) says supply will stay tight in the ‘burbs for the foreseeable future, besides build-to-suits like Hub Group in Oak Brook. If the ‘burbs can control their NIMBYs, we should see continued ex-urban infill residential and office development. Add in the young families returning to the ‘burbs for the school systems, and we’ll have a natural uptick in demand. (Rick’s already seeing it on the paddle tennis courts.)
Pearlmark Real Estate Partners managing director Matt Haley (Rick’s JV partner, with Angelo Gordon, at Columbia Centre) has owned in a lot of suburbs in major US markets, and he says so far Chicago suburbs’ leasing economics are horrendously poor. (He's on the right, above, with JF McKinney's John McKinney.) After doing 300k SF of suburban leasing in the past year, he saw payback on a net rent basis for TI, leasing commissions, etc. at almost eight years. (Compare that to three years in LA and six years in Detroit.) “The risk isn’t worth the extra 300 to 400 bps of potential return,” Matt says. The suburbs' redeeming qualities are affordable housing and good school systems, he adds.
Suburban retail is seeing the reappearance of spec projects, First Western Properties president Paul Tsakiris says. (He's second from right, above, with First Western's Tom Peterson, Fahim Lakhani, and Kellen Duggan.) He’s leasing up Freedom Commons, a spec development in Naperville, and the LOIs (mostly food and services tenants) are robust. These projects are vital in attracting big office tenants and their lifestyle-oriented employees, Paul says. (Just ask Rick—MB Financial Park in Rosemont boosted traffic at Columbia Centre 300%, he says.) Investment-wise, retail spreads are large enough to attract national attention. Just recently, Paul had some buyers fly in from Upstate NY to look at a 35k SF Aldi shadow-anchored retail center (a cap rate play) in Ottowa, Ill., a way-out tertiary market.
HFF managing director Christopher Carroll moderated our panel. This is the third straight year of improvements in suburban real estate, and it’s experiencing dramatic changes thanks to less ownership-focused and incredibly transit-oriented Millennials, he says. While the city and suburbs could stand to lose their “us-versus-them” mentality and work together to grow our economy at large, we’re still the undisputed hub of the Midwest. Chicago is also the transportation nexus for the entire country and has an enviable supply of fresh water, Christopher notes, which will become a major issue in cities like Phoenix and Las Vegas in the next 10-15 years.
During networking we stopped by our sponsor JC Anderson’s table. Snapped: marketing specialist Kate Garassino and project executive Anthony Douglas. View more pics from the event here.