The investment market in North America was nothing less than astounding in 2004 and a competitive buying environment combined with low interest rates has fuelled that trend in 2005 so far. Foreign investors have always had the US on their radar screens, but the investment environment in recent years has brought more overseas interest and increased their aggressiveness in efforts to win assets. Competition for office, retail and industrial properties has been fierce in the primary markets, which for the Mid-west means Chicago and on a smaller scale Minneapolis, because of strong or improving leasing activity and rising rental rates.
Chicago, the nation’s third-largest city, boasts a $350bn (e294bn) economy and one of the most diversified economies in the country. Because of the liquidity of the market, as well as being home to the Chicago O’Hare International Airport and Chicago Midway Airport, Chicago has historically been popular with foreign investors looking to diversify their portfolios in a stable market. The market’s slow but reliable growth, in terms of employment and population, leads to less of a variance in its highs and lows.
The Chicago downtown office market reported
an overall vacancy rate of 15.7% in the first quarter of 2005. This was affected significantly by the completion of the Hyatt Center which added over 300,000ft2 of direct space to the overall 18.9mft2 of direct vacant space downtown. Despite a high vacancy rate, a fair amount of leasing activity
transpired during the quarter, driven mostly by early renewals and extensions. Tenants in the 15,000-20,000ft2 range dominated the activity, with professional services firms, in particular, among the most active. A total of 22.8mft 2 of space direct and sublease is available across Chicago’s CBD, emphasising the imbalance of supply and demand.
Despite office sales closing at a record pace, new construction starts during 2004 and thus far in 2005 have been moderate. The highly anticipated delivery of the 150,000m2 Hyatt Center at 71 S Wacker was the only construction activity to report during the first quarter 2005. The building opened 77% pre-leased. No new buildings broke ground in Chicago’s CBD during the first quarter 2005, but two additional buildings are slated for completion during the year – Dearborn and 111 S Wacker. These two buildings will add over 1.1million m2 to downtown’s inventory once brought online. In conceptual stages, several buildings could be on the horizon, with developer Steven Fifield giving the city plans for a 38-storey building at 601 W Monroe, and Development Resources Inc beginning marketing on its proposed 15-storey building at 120 N Jefferson. While low interest rates and investors seeking steady returns have contributed to increased sales, relatively high vacancy rates and cautious lenders have kept new construction in check.
Investors’ interest in the mid-west is built around the stability of the market. Chicago does not experience the high market fluctuations as many of the other coastal markets such as Los Angeles or Miami, but it is also slower to recover.
The key to an improved commercial real estate market in Chicago is job growth. Everyone is anxious to see improvement in hiring trends in Chicago, and while the national economy added jobs in February, Chicago still lags the overall market in hiring. Some hope can be derived from the expansion recently noted by professional services firms, but employers are hiring cautiously and stringently examining space needs before expanding. The Illinois Department of Employment Security (IDES) reported, in February, that total jobs in the Chicago metro area rose 24,600 and five industry sectors experienced employment growth in a majority of metro areas. The IDES also reported a decrease in the Chicago metro unemployment rate of 0.1 point to 6.4% in February.
Due to Chicago’s current fundamentals, investors continue to approach the market with caution. Quality assets in prime locations yield the most aggressive bidding as demand drives up pricing. Prices on such buildings have soared in record
per-ft2 levels with yields below 7%. Yields for net-leased deals with rent increases will be in a similar low range. Multi-tenant assets that are more management intensive - but still offer a nice mixture of lease expirations - are also pushing prices, with yields in the mid-7-8% range. There is demand for those multi-tenant assets that have higher perceived vacancy risk, where cap rates are 50-100 basis points higher.
Most recently, Chicago developer Golub & Co, and Quinlan Private, an Irish real estate investment firm, purchased 225 W Washington Street, a West Loop office tower. Dublin-based Quinlan Private has a multibillion-dollar portfolio of 160 assets
primarily located in Europe, including some of London’s best-known hotels. Founded in 1989 by Derek Quinlan, a former tax inspector, the firm has clients who are largely wealthy individual investors. Terms of the deal were not disclosed, but speculation puts an estimate of the sale price at about $100m.
The joint venture is a sign of the increasing globalisation of the commercial real estate industry. One year prior, Quinlan Private purchased an office-retail building in Prague developed by Golub. Quinlan Private has begun looking to invest in the US and is reportedly targeting major East Coast cities such as Boston, New York and Washington, in addition to Chicago.
For 225 W Washington, the Quinlan-Golub venture moved quickly, closing approximately one month after coming to terms. The 480,000ft2 building, built in 1987, is 82% leased.

In June, a German investor finalised a deal to invest in Citicorp Center, entering a partnership with General Electric’s pension fund in the West Loop tower. GE Asset Management, adviser to the General Electric Pension Trust, has restructured the capitalisation of the CitiCorp Center by securing a $250m, 10-year interest-only loan. The new equity was raised by Estein’s Germany-based US Treuhand, which also owns a 70% stake in Bank One Centre at 131 S Dearborn in Chicago. Simultaneously, Orlando-based Estein & Associates USA purchased a 50% stake in the building. GE Asset Management controls the 125,000m2 building, while MB Real Estate Services LLC leases and manages the property.
In the current 24/7 information world, investors now have access to real-time market research and information that was not always available in years past. Overseas investors can read, dissect and compare markets worldwide at the touch of a keyboard, giving them a more complete picture of the market. Average rental rates, building occupancy, market vacancy rates and square footage can all be found from a number of varying resources, all of which leads to a more informed investor.
Led by positive job growth and an improving economy, the Chicago economy will continue to show signs of slow improvement in 2005. The downtown commercial real estate market will still be plagued with slow tenant activity combined with new construction. This should not slow down investment activity in the Midwest as subdued stock-market investment expectations continue and commercial real estate offers the best alternative for steady returns.
Long-term interest rates remain near historic lows with the 10-year treasury yield ending 2004 at 4.2%. Although long-term rates were widely anticipated to rise during 2004, no increase materialised. The resulting stability helped fuel demand and provided leveraged buyers an opportunity to compete aggressively for properties. These low rates also helped offset relative vacancy rates and weaker fundamentals in both suburban and downtown office markets, thereby enabling buyers to pay top dollar for certain properties. The two factors have lead to cap-rate compression, which has bolstered pricing.
Yield requirements for some foreign investors in particular are very low by historic standards, which also allow them to bid-up building values. Furthermore, with the recent precipitous decline in the dollar, these foreign funds have the currency to continue bidding aggressively. A great deal of money chasing limited product creates a robust investment environment that bodes well for 2005. There are, however, some risks. Many pundits again forecast inflation and rising interest rates for this year. Given the negligible or negative rental rate growth seen in both office and industrial sectors, transactions that are deemed the safest - net lease deals with attractive rent steps; single-tenant industrial and retail properties leased for the long term; or retail assets in high-traffic infill areas anchored by top-performing national brands - will continue to command very high prices. As a result, 2005 should be another very strong year for investment sales.
Gregory Vorwaller is president, investment properties at CB Richard Ellis in Chicago