REALTORS See Confidence in Commercial Real Estate Market

May 28, 2014
By Amy Robey, MORe Now Contributor
The commercial real estate market is well on its way to recovery according to an panel of economists and research experts at the REALTOR® Party Convention and Trade Expo in Washington, D.C., recently.

"Commercial real estate closely follows the economy, usually with an 18 to 24 month lag time," said Lawrence Yun, Chief Economist for the National Association of REALTORS®. "REALTORS® from across the country are reporting increases in sales transaction volumes and income, which tells us that things are turning around. We have not reached pre-recession levels, but the recovery is happening, we are almost getting back to normal."

John Sikaitis, managing director for Local Markets and Office Research for JLL, discussed the changing dynamics for office space in the U.S.

"Companies are moving away from the traditional office park," he said, "In the next five to seven years, the large office buildings off the highway will be obsolete. If a property does not have the urban amenities preferred by young Millennials, including access to transit, shopping, restaurants, etc., then it is not going to survive without substantially reducing its rent."

In line with the growing demand for urban amenities, companies are beginning to focus on the quality of space over size.

"Since the great recession, large and small offices alike have changed the way they use real estate," said Sikaitis. "Businesses are averaging less space per worker and beginning to focus on how their office space can contribute to the health and well-being of their employees."

Features such as air sanitation, circadian rhythm lighting and layouts that promote movement and fitness are becoming common place in many office spaces, he said. Read REALTORS® Declare Confidence in Commercial Market for more information.

Chicago Suburban Commercial Market Insight

Paul Martis, Chairman of the Commercial Committee for the Mainstreet Organization of REALTORS®, sees continued growth in the retail sector in the Chicagoland suburban market.

"In the future I think some retailers may opt for downsizing overall typical retail space. They are looking at how e-retail is affecting their brick and mortar," said Martis. "Many more are closing their doors or adjusting their market expansion to have smaller footprints to offer the same day or next day delivery. It could be a place to stop in and place your order and receive it the same day or next day."

He indicates retail vacancies average 11-12% while he sees office occupancy rates lagging behind at 20-25%.

"Office and retail development is based upon movement in the workforce and we are not seeing a lot of new construction but more reoccupation of infill sites that may have been sitting empty for years and builders are taking over those sites and putting up new product," said Martis, broker with Coldwell Banker Residential Brokerage in Oak Brook.

The multi-family market continues to be the hot sector of the commercial market with absorption at around 4% in vacancy rates for Chicagoland area, according to Martis.

"Multi-family is a rich opportunity in any market right now," says Martis. "I don't think we can go much lower in terms of vacancy rates from where we are in the 4% range.

Martis also anticipates a redesign of typical office space.

"Many spaces are becoming what we were seeing back in the 70s, an open space environment where you can get two or three people around a common area and they are able to work and be linked to a network and you don't need a large desk and private office," he said.

He also sees expansion of the boutique hotels in the suburban area.

"We are seeing opportunities for smaller footprints in hotel design where people don't need to stay in a large facility," he said."The food type businesses are also really drawing attention to old retail centers."

Kristian Lee, commercial broker with Schulz Properties, Ltd. in Downers Grove, sees further expansion in the industrial market. A commercial broker for the past 12 years, Lee, who is the incoming chairman of the MORe Commercial Committee, is starting to see less availability of Class A industrial property space which will lead to new development.

"The industrial market is starting to get healthier. it is a lot better than it was. Leased rates are going up as compared to last year as occupancy rates are going up," said Lee. "The first quarter vacancy rate is 8.1% for the entire Chicago area for the industrial market area. Transactions are still slow though. People aren't making decisions quickly. They are examining the economy and where their company is growing."

Lee indicates this is the 15th consecutive quarter of positive net absorption for industrial growth in the Chicagoland market. Nationally annual industrial rents should rise 2.4% this year and 2.6% in 2015.
Past chairman of the MORe Commercial Committee, Theresa Schulz with Schulz Properties, Ltd. of Downers Grove, has an identified niche in the smaller retail and office range (1,000 to 1,800 square feet).

"I'm seeing a lot of retailers expanding and adding more units," said Schulz. "The rents have finally stabilized if not increased. Retail in the right "Type A" product has dramatically gone up.

"The grocery concept is in high expansion mode right now in the city and suburbs. With the expansion of Mariano's grocery stores, they are creating a destination area and, as a result, have a much bigger retail footprint for their area of location. More developers are wanting to be part of that development going on."

Schulz says three years ago she was busy repositioning clients into lower cost buildings as they didn't need premium locations because they were more focused on their budget and economic terms of the deal.

"Now that those leases are rolling due, they are questioning whether they are in the right location and do they want to rebuild their brand and get back into that higher priced retail space," said Schulz.

Schulz also foresees continued growth for the casual restaurant concept.

"The fast casual is still going to be active for the next couple of years," she said. "I see continued growth for these niche markets."

Also from a retail point of view, the gaming groups are starting to take a huge lead in absorbing available retail space throughout the suburbs, Schulz says.

Schulz sees the office vacancy market slowly recovering.

"Rents are stabilizing, but I'm not seeing an increase in office rents as I have the retail side," she said. "Office is a slow recovering area in the Chicago suburban market."

According to the National Association of REALTORS® commercial members completed a median of eight transactions in 2013, equal to the previous year according to the 2014 NAR Commercial Member Profile.  

 REALTORS See Confidence in Commercial Real Estate Market

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