Q4 2014 | INVESTMENT
CHICAGO INVESTMENT MARKET OVERVIEW
Investment fundamentals in Chicago improved tremendously in 2014, with many sectors reporting sales approaching near-peak levels. Office
As was the case in 2013, U.S. investors have indicated a clear preference for office assets in their home country, with three out of four respondents in Colliers International’s annual “Global Investor Sentiment” report anticipating that their primary investment focus during 2015 will be in the United States. Demand from both domestic and cross-border investors remains voracious, particularly given softening economic conditions elsewhere around the globe. The Illinois and Chicago economies showed considerable improvement in 2014 and this appears to be carrying into 2015. An unresolved fiscal situation and a new governor will be watched closely as a economists predict that a multi-year strategy will be critical to restore the financial health of the City and State. The Chicago metropolitan area saw rapidly improving fundamentals in 2014, as CBD vacancy has fallen from 13.8 to 13.1 percent, and even Chicago’s beleaguered suburban office market has posted its lowest office vacancy level in six years. CHICAGO CBD For the third consecutive year, CBD office investments remain the top pick for global investors. While the so-called “gateway cities” continue to be favored, the demand for CBD assets in Chicago over the past year has exploded. Heated competition for assets in the coastal markets, coupled with very favorable market trends locally, has resulted in a banner year for CBD office building sales. Chicago continues to be recognized globally as one of the country’s most important financial and cultural centers and a key target market in office acquisitions. The CBD’s intangibles include:
• A steady CBD population surge and employers’ awareness of this new demographic trend • Numerous new migrations of large tenants from the suburban office market • 27 companies have chosen to locate headquarters in Chicago since 2011 • 31 Fortune 500 firms are located in the MSA and eight of those are in Chicago proper • Chicago’s rapidly growing tech sector is transforming entire neighborhoods and restoring life into some of the city’s oldest buildings. Beyond economic statistics, there are several positive trends occurring that are fueling office investment activity in Chicago:
• Net absorption and increasing rental rates are gaining momentum • Cheap and plentiful debt is available, and rates remain steady • Equity investors are less averse to risk and are seeking higher yield
www.colliers.com/chicago RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
• Existing office building owners are readily seeking to capitalize on investor demand • There have been relatively few new construction deliveries in the region Many value-add buyers are repositioning their more traditional office space to appeal to the CBD’s robust technology sector that has emerged as a result of extremely tight fundamentals in the River North submarket. Tech firms have historically found River North appealing due to its less traditional space options, including brick and timber loft-style spaces. However, with little to no large blocks of creative space now available in the submarket, these companies will need to refocus their space search to include more traditional building types. This presents an opportunity for landlords to recruit these sizeable tenants into the CBD’s traditional buildings by offering more unique amenity packages. Fundamentals suggest that both tenants and landlords remain optimistic for the near term. Tenants with expirations as far out as 2020 are now actively seeking space, a sign of optimism about the future of their businesses. Additionally, that same confidence has been reflected by landlords who have responded to tenant demand by pushing rental rates upwards of 7.6 percent over the past year.
Conversions Abound In 2014, we witnessed the continuation of a robust trend of buildings being converted or recycled into alternative uses, such as hotels or retail. Recent or ongoing conversions of office into hotel or residential include the Gibbons/Steger buildings (Infinite Student Housing) Old Colony building (Student Housing), 203 N. Wabash Avenue (Virgin Hotel), 100 W. Monroe Street (Hyatt Hotel), Chicago Motor Club (Hampton Inn), Oriental Theater office space (Multifamily), 11 S. LaSalle (Marriott), and 39 S. LaSalle (Kimpton Hotel). This trend of converting Class C office has reduced the supply and therefore is causing upward pressure on Class C rental rates. OLD COLONY BUILDING In another interesting adaptive re-use deal, Blue Star Properties acquired the 500,000 SF Chicago 407 S. DEARBORN STREET Public Schools headquarters building and intends to convert the building into loft-like space to serve the burgeoning tech and creative sectors. Chicago CBD office investments 2014 CBD Office Investment Activity totaled $4.5 billion in 2014, with Chicago CBD office investments totaled $4.4 billion in 2014, with another $800 million on the market another $800 million on the or scheduled to close. The implied total of $5.2 billion is an increase of almost 40 percent compared market or scheduled to close. to the $3.75 billion in sales transacted in 2013. The average price paid in 2014 equaled $279 per square foot compared to $228 per square foot in 2013. This number jumped due to the significant sale prices of Super Class A properties such as 300 North LaSalle Street ($652 per square foot) and 353 North Clark Street ($604 per square foot). Buyers remain eager to buy trophy office buildings in Chicago’s CBD. At year’s end, Chicago-based Heitman paid $715 million to Tishman Speyer for the 1.2-million-square-foot property at 353 North Clark Street. This was the Chicago CBD’s second- largest office trade in 2014, behind the June sale of 300 North LaSalle Street, wherein Irvine Co., of Newport Beach, CA paid $850 million to KBS Realty for the 1.3-million-square-foot tower. Investors also continue to purchase core-plus and value-add opportunities with large vacancies such as 311 West Monroe and 515 State Street (sale pending). As an example of buyers having an interest in acquiring deals with vacancy, Golub sold 311 West Monroe for $58 million to GlenStar Properties in a joint venture with Prudential. The major tenant BMO Harris will soon be vacating. The year ended on a high note with seven fourth quarter sales totaling over $1.4 billion. Deutsche Bank, in a joint venture with Lincoln Property Co., completed a very unique transaction with TIER REIT for the Fifth Third Center at 222 S. Riverside Drive. Deutsche Bank made a pre-emptive bid of $247 million before the property even came to market. As part of the purchase price, Deutsche reportedly transferred a Dallas office building to TIER. Manulife/John Hancock continued to be active in the CBD market by reportedly selling a majority interest in 191 N. Wacker Drive to Allianz as part of a two-property portfolio including an asset in Washington DC, and acquiring 55 West Monroe Street from The Hearn Company for $243 million. Meanwhile, Hearn acquired the 1.4 million-square-foot Three First National Plaza for $375 million from Korea Teachers Credit Union.
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Foreign investment continued to be a steady barometer of the health of the CBD investment market. Canada-based Manulife (operating in the U.S. as John Hancock) completed its fifth CBD transaction in four years with the two transactions mentioned earlier. One of Israel’s largest financial institutions paid $112 million for Harper Court, a retail and office complex master-leased by University of Chicago. Exhibiting the demand for quality assets with long term credit leases, the institution reportedly received dozens of offers in the low five percent cap rate range. Accesso Partners - formerly known as Beacon Investment Properties – primarily represents investors in South America and Israel, and continued its torrid pace of Chicago-area acquisitions by acquiring 200 and 230 West Monroe Street. With $4.4 billion of office properties having traded in Chicago in 2014, and another $.8 billion expected to sell in the first quarter of 2015, Chicago is expected to continue its robust trading activity. 2014 Chicago CBD building sales are summarized below.
HARPER COURT SOLD FOR $501 PSF CHICAGO CBD SALES | 2014
NAME / VALUE SF PSF SELLER PURCHASER LOCATION
300 North LaSalle $850,000,000 1,302,901 $652 KBS REIT II Irvine Co 353 North Clark Street $715,000,000 1,184,000 $604 Tishman Speyer Heitman Korea Teachers CU Hearn Co JV GEM Three First National $374,800,000 1,439,367 $260 JV KFCC JV Gaw Realty JV Farallon Plaza Capital Capital Management China Cinda Asset Fremont Group Management Co 311 South Wacker $302,400,000 1,276,850 $237 JV Shorenstein Ltd JV Zeller Realty Properties Corp 191 N Wacker Dr $260,000,000 732,000 $355 Manulife Financial Allianz of America Deutsche Bank JV Fifth Third Center $247,000,000 1,184,432 $209 TIER REIT Lincoln Property Co Hearn Co JV Mount 55 West Monroe Street $243,750,000 803,046 $304 John Hancock Kellett 30 North LaSalle Street $237,500,000 909,245 $261 Tishman Speyer AmTrust Realty LaSalle OBO BVK 101 North Wacker $210,000,000 617,000 $340 Hines JV Universal- Investment Beacon Capital 180 N Lasalle St $126,000,000 767,605 $164 Berkley Properties Partners 230 West Monroe Office Lincoln Property Co $122,000,000 624,000 $196 Accesso Partners Tower JV PIMCO University of Harper Court $112,000,000 223,775 $501 Clal Insurance Chicago 203 North Lasalle Street HCI Capital AG JV $111,500,000 581,100 $192 Sumitomo Corp (13F-27F) M&J Wilkow Ltd Beacon Investment Farbman Group JV 200 West Monroe $100,000,000 535,911 $187 JV Harel Insurance Lubert-Adler 353 N. CLARK STREET Invts SOLD FOR $604 PSF Previdi 200 South Michigan Equus Capital Redevelopment $69,000,000 359,560 $192 Avenue Partners Equities LLC JV Shidler Group Golub & Co JV GlenStar Properties 311 West Monroe $58,000,000 385,000 $151 Archon JV East JV Prudential RE Rock Capital LLC Investors 541 North Fairbanks Golub & Co JV Wells NW Memorial $57,000,000 441,000 $129 Court (Fl 1-2 & 8-28) Fargo Hospital LaSalle Wacker Building Lincoln Property Co $52,500,000 360,000 $146 Sterling Bay Cos (Office) JV Cape Horn Group Lexington Realty JV FCB Center $34,175,000 224,565 $152 Laurence Geller Clarion Partners
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CHICAGO CBD SALES | 2014
NAME / VALUE SF PSF SELLER PURCHASER LOCATION
Norddeutsche 33 N Lasalle St $32,750,000 402,010 $81 Vermogen JV Golub John Buck Co & Co Blue Star Chicago Public Schools Chicago Public $28,000,000 508,000 $55 Properties JV HQ Schools Wolcott Group 541 North Fairbanks Chicago Park NW Memorial $22,500,000 110,000 $205 Court (Fl 3-7) District Hospital Winthrop Realty Brooks Building $15,327,000 162,029 $95 Marc Realty Trust Fortuna Asset Michael Moyer/ Management JV Old Colony Building $13,300,000 157,406 $84 Keith Giles JV CA Aura Real Estate & Ventures Management LLC 105 West Madison Baker Development $13,000,000 125,729 $103 Extell Street Corporation 105 West Madison $13,000,000 125,729 $103 LNR Extell Street Oriental Theatre David and Barbara $12,000,000 225,068 $53 John T Murphy 300 NORTH LASALLE Building Kalish HIGHEST PSF SALE IN THE CBD ($652 PSF) Studebaker Bldg $7,637,500 146,088 $52 Marc Realty Windy City RE
TOTAL: $4,440,139,500 15,913,416
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SUBURBAN CHICAGO Even after suffering through the departure of numerous corporate users early in the year, the Chicago suburban office market rallied in the second half of 2014. Over 1.8 million square feet of notable new lease transactions were signed during the year, and twelve blocks of new lease transactions greater than 50,000 square feet were completed. This rebound helped to offset the 1.2-million-square-foot departures of Motorola Mobility and Capital One from the north suburbs during the early part of the year. While 2014 ended strongly, the overall vacancy rate remained at 21.1 percent as compared to the 21.0 percent vacancy posted at year-end 2013.
Current Trends
NATIONAL PLAZA I, II & III As we have seen in most major markets, corporate tenants continue to look for opportunities to SCHAUMBURG create more efficient work environments and increase their densities, i.e. more people per square foot. This is causing parking issues for mid-sized and large tenants, as the standards have swung significantly from 4.0 to as high as 6.0 per 1,000 square feet. Many buildings cannot accommodate these high density users, causing landlords to rethink their parking infrastructure. It also makes properties that are accessible to public transportation more desirable. The optimism in the suburban market is measured by the significant increase in the number of larger tenants that are looking for space. Currently there are over 115 tenants seeking 10,000 square feet or greater in the suburbs, compared to 85 tenants that were in the market at year-end 2013. This increase is expected to continue throughout 2015, with landlords expecting rising rental rates and lessening concessions. The optimism in the suburban market is measured by the significant increase in the number of larger tenants that are looking for space. Currently there are over 115 tenants seeking 10,000 square feet or greater in the suburbs, compared to 85 tenants that were in the market at year-end 2013.
2015 Leasing Forecast Generally, suburban office investors expect that in 2015, while select markets may be looking to build inventory, Class A rental rates are expected to increase, while Class B rates will just start to witness a slight increase in rents. Class A concessions are expected to hold somewhat firm during the year while Class B properties are expected to still offer generous concession packages. As it was last year, however, the suburban market is still a conundrum for most office investors. A strong knowledge of the individual submarkets and the key trends within them are the keys to investing in the Chicago suburbs.
2014 Suburban Chicago Office Investment Activity The overheated CBD market has brought investors back out to the suburbs seeking yield and upside opportunities presented by cheap debt and a surging office demand. Colliers tracked the sale of 54 suburban office assets in 2014, resulting in an overall transaction volume of just over $1.1 billion, with an average sale price of $101 per square foot. This average is skewed by the sale of the 1.1-million- square-foot Motorola Mobility campus in Libertyville for $8.50 per square foot. Without that transaction, the average sale price in the suburbs was approximately $111 per square foot. The overall results are very similar to transaction volume in 2013. However, $990 million of 2014 activity is attributable to the sale of the 28 properties that traded at prices over $10 million. The remaining 26 sales were of smaller assets which in total created just under $130 million in total transaction volume. In 2014, individual prices ranged from $16 per square foot on up to the two larger transactions of the year, Tellabs HQ and Highland Landmark II, which traded at prices over $225 per square foot. In the early part of 2014, many special servicers, believing that values had begun to stabilize, put properties on the market, which were heavily sought after by a heated-up pool of value-add and opportunity investors. CW Capital, as part of its $2.5 billion portfolio of properties and loans, quickly sold off Chicago area properties in Evanston, Schaumburg, and Lisle, among others. Corporate occupiers continued to make moves in the suburbs as well in 2014. Salvation Army acquired Two Park Center, a 194,000-square foot building in Hoffman Estates, from Wells/Piedmont, TELLABS HQ and The Salvation Army intends to use the building as its central region headquarters. The American 1415 W. DIEHL ROAD, NAPERVILLE
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Society of Safety Engineers also acquired the American Society of Anesthesiologists headquarters in Park Ridge for $108 per square foot. Sale leasebacks and single tenant activity in in 2014 included the Tellabs HQ sale-leaseback to Select Income REIT, and Griffin Capital’s acquisition of the long-term net leased Ace Hardware headquarters in Oak Brook. A unit of American Realty Capital Properties paid $12.8 million for Four Woodfield Lake, a 106,400-square-foot office building in Schaumburg that is fully leased to AT&T Inc. Each of the submarkets had significant sales activity in 2014. Examples are highlighted below.
O’HARE SUBMARKET Nine office buildings changed hands in the O’Hare market in 2014 with an average transaction size of COLUMBIA CENTRE III $22 million. Total transaction volume in the submarket was $199 million in aggregate, with over 1.7 DES PLAINES million square feet of office space selling for an average of $116 per square foot. Notable investment sales in the O’Hare market include the sale of Columbia Centres I, II and III which were acquired by Canadian investor Adventus from White Oak/Angelo Gordon for $93.1 million ($108 psf). International Tower was sold by CW Capital to Lone Star Funds earlier in the year for $30 million and by the fourth quarter of 2014, traded hands once again to an acquisition group led by Golub and Co. for $41 million, amounting to a $35 per square foot profit over the brief holding period. At year’s end, the normally industrial-minded Brennan Investment Group acquired Cumberland Metro for $18.5 million ($113 psf).
O’HARE SALES | 2014 NAME/LOCATION CITY VALUE PRICE PSF DATE Cumberland Metro Office Park Chicago $18,500,000 $113 Dec-14 International Tower Chicago $40,900,000 $135 Nov-14 Columbia Center II Des Plaines $20,333,000 $136 Oct-14 Columbia Centre I Des Plaines $31,803,000 $144 Oct-14 Columbia Centre III Des Plaines $40,964,000 $171 Oct-14 520 N Northwest Highway Park Ridge $3,467,510 $108 Aug-14 1350 E Touhy Avenue Des Plaines $6,153,552 $28 Aug-14 1101-1171 Tower Lane Bensenville $6,945,000 $81 Jul-14 International Tower Chicago $30,300,000 $100 Feb-14 TOTAL: $199,366,062 $116.11
NORTHWEST SUBMARKET The Northwest market was quite active in 2014, accounting for one-third of the office building sales in 2014. Eighteen office buildings changed hands in the Northwest market in 2014 with an average transaction size of $16 million. Total transaction volume in the submarket was $288 million in aggregate. The Northwest market was also was the “most affordable,” with over 3.8 million square feet of office space selling for an average of only $76 per square foot.
One of the most-watched sales of the year included the $127 million sale of Kemper Lakes Business Center by Equus Capital Partners. Although an initial transaction with a major insurance company unraveled, Apollo Global Real Estate was able to negotiate favorable terms with the seller and close in the fourth quarter at an 8.5 percent cap rate. Eight transactions in Schaumburg also traded in 2014, including the sales of Four Woodfield Lake, a Class A asset fully leased to AT&T for $12.8 million ($120 psf). The other Schaumburg assets traded in the general range of $20 to $50 per square foot.
Several investment sales occurred earlier in the year, including One, Two & Three National Plaza, a 389,123-square-foot campus in Schaumburg, which sold to RMS Properties for $11.4 million ($29.50 per square foot), Meadows Corporate Center West, a 299,331-square-foot property in Rolling Meadows that sold to Arthur J. Gallagher for $13.4 million ($46.50 per square foot), Meadows Corporate Center East, a 270,200-square-foot property in Rolling Meadows that sold to the John Buck Company for $11.6 million ($42.90 per square foot) and Woodfield Executive Plaza, a 196,144-square foot property in Schaumburg that sold to Sabal Financial Group for $9.4 million ($48.00 per square foot).
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NORTHWEST SALES | 2014 NAME/LOCATION CITY VALUE PRICE PSF DATE Kemper Lakes Business Center Long Grove $127,000,000 $115 Nov-14 21440 W Lake Cook Road Barrington $40,510,000 $115 Sep-14 RTC Industries Building Rolling Meadows $13,622,500 $99 Sep-14 4 Woodfield Lake Schaumburg $12,775,000 $120 Sep-14 95 W Algonquin Road Arlington Heights $13,600,000 $100 Aug-14 300 N Martingale Road Schaumburg $6,140,000 $40 Aug-14 Regency Executive Center Huntley $2,350,000 $62 Jun-14 55 East Commerce Drive Schaumburg $1,650,000 $82 Jun-14 KEMPER LAKES BUSINESS CENTER LONG GROVE 1717 N Penny Lane Schaumburg $1,208,000 $39 Jun-14 Two Park Center Hoffman Estates $8,825,000 $46 May-14 1701 E Woodfield Road Schaumburg $2,769,336 $16 Mar-14 2010 S. Arlington Heights Road Arlington Heights $2,200,000 $57 Feb-14 National Plaza I, II and III Schaumburg $11,400,000 $29 Feb-14 Meadows Corporate Center Rolling Meadows $11,575,000 $41 Feb-14 East Tower Meadows Corporate Center Rolling Meadows $13,425,000 $47 Feb-14 West Tower 1051 Perimeter Drive Schaumburg $9,405,000 $48 Feb-14 955 American Lane Schaumburg $3,828,500 $35 Feb-14 3930 N. Ventura Drive Arlington Heights $6,000,000 $109 Jan-14 TOTAL: $288,283,336 $76
NORTH SUBMARKET The North market recorded eleven transactions totaling just over $130 million in aggregate value. One of those sales was the massive Motorola Mobility campus in Libertyville that was sold to Rockville, MD-based BECO Management Inc., which is in early stages of its “Innovation Park Lake County” redevelopment. The property traded at $8.50 per square foot, which skews the market summary. Without the Motorola sale, the average transaction size in the market was $11 million, and with over 1 million square feet of space trading, the average sale price is $118 per square foot. With the Motorola property included, the average price is significantly reduced to $61 per square foot, clearly not an accurate reflection of the market. Imperial Realty’s sale of the 120,000-square-foot Westmoreland Building in Skokie opens up some interesting redevelopment opportunities for Singerman Real Estate given the property’s positioning next to Westfield Old Orchard Mall. Similar dynamics exist for Centrum’s acquisition of 850 Milwaukee Avenue in Vernon Hills, which is an office building located on a prime intersection adjacent to Westfield Hawthorn Center. Evanston recorded another transaction in 2014 with Oaktree’s $15 million acquisition of the 120,000-square-foot office building at 500 Davis from CWCapital. For the first time in seven years, real estate billionaire Sam Zell is a suburban Chicago landlord, after he teamed up with Fulcrum Asset Advisors to acquire One Conway Park in Lake Forest. The group paid just over $13 million ($125 per square foot) for the Class A building which, given its vacancy at sale of approximately 25 percent, proves to be an opportunistic investment for the partnership.
NORTH SALES | 2014 NAME/LOCATION CITY VALUE PRICE PSF DATE 101 Waukegan Road Lake Bluff $4,600,000 $49 Dec-14 850 Milwaukee Avenue Vernon Hills $5,000,000 $91 Aug-14 600 North U.S. Highway 45 Libertyville $9,500,000 $9 Jul-14 500 DAVIS STREET Westmoreland Building Skokie $15,000,000 $150 Jun-14 EVANSTON
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NORTH SALES | 2014 NAME/LOCATION CITY VALUE PRICE PSF DATE Church Street Office Center Evanston $9,600,000 $63 Jun-14 Riverwalk II Buffalo Grove $45,000,000 $174 May-14 500 Davis Street Evanston $14,873,000 $125 Feb-14 3300 Dundee Road Northbrook $3,250,000 $127 Feb-14 Pine Meadow Corporate Center II Libertyville $8,000,000 $89 Feb-14 Buffalo Grove Business Park Buffalo Grove $2,347,700 $106 Jan-14 One Conway Park Lake Forest $13,100,000 $125 Jan-14 TOTAL: $130,270,700 $61
EAST-WEST CORRIDOR There were 16 office buildings that sold in the East-West Corridor in 2014 totaling $501 billion, which was nearly half of the suburban transaction volume on a dollar basis. The average transaction size was $33 million. With over 3.4 million square feet of properties trading hands, the average sale price in this submarket was highest, at $145 per square foot. These strong numbers were achieved through four significant transactions, including the sale OAK BROOK EXECUTIVE PLAZA leaseback of Tellabs headquarters in Naperville to Select Income REIT for $187.5 million. Also OAK BROOK changing hands were Highland Landmark II, which James Campbell Co. puchased for $62 million; and the off-market trade of Highland Oaks I and II, purchased by Accesso Partners of Florida, which has recently acquired six CBD and suburban properties valued at $400 million. Other significant investment sales in the fourth quarter of 2014 include the Davis Companies’ purchase of Washington Pointe, a 163,623-square-foot property in Naperville, which sold for $14 million ($85.56 per square foot), and Griffin Capital’s acquisition of the long-term net leased Ace Hardware headquarters from Inland at a 7.7 percent cap rate.
EAST-WEST CORRIDOR SALES | 2014 NAME/LOCATION CITY VALUE PRICE PSF DATE 2211 Butterfield Road Downers Grove $5,075,000 $95 Nov-14 Washington Pointe Naperville $14,000,000 $86 Nov-14 Oak Brook Executive Plaza Oak Brook $57,500,000 $148 Oct-14 Highland Oaks I & II Downers Grove $46,025,000 $144 Oct-14 Former Mid-Con Energy HQ Lombard $18,490,000 $107 Sep-14 Highland Landmark II Downers Grove $62,000,000 $226 Aug-14 1000 & 1010 Lake Street Oak Park $6,950,000 $68 Jul-14 700 Pasquinelli Drive Westmont $1,535,000 $99 Jun-14 711 Jorie Blvd Oak Brook $12,225,000 $61 Jun-14 Ace Hardware Headquarters Oak Brook $37,000,000 $180 Apr-14 Ogden Corporate Center Lisle $12,000,000 $139 Apr-14 Tellabs HQ Naperville $187,500,000 $229 Apr-14 Cantera Meadows Warrenville $28,400,000 $139 Mar-14 High Point Plaza Hillside $3,038,357 $16 Mar-14 Harris Bank Building Palatine $4,000,000 $30 Jan-14 1717 Park St. Naperville $5,722,500 $50 Jan-14 TOTAL: $501,460,857 $145.50 CONCLUSION Riding the $2 billion-plus wave of activity over the past two years, we expect that 2015 will be another big year for investment sales in the suburbs, as owners look to cash out, and opportunists get more comfortable in buying. Several who purchased earlier in the cycle have already cashed out with substantial profits. With suburban discount to replacement costs at attractive levels, numerous investors are seeking to control the next available opportunity, especially if it has a good story.
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Industrial 2014 was a historical high in terms of investment sale volume of Chicago industrial product. Approximately $1.85 billion of property was traded during the year. This level is close to the two prior years combined and exceeds the prior peak of $1.7 billion in 2006. The record volume can be attributed to the following factors: increased global equity capital flows targeted for the industrial sector, low interest rates and corresponding increased debt capital desiring industrial product, and the continued strong industrial fundamentals exhibited by the Chicago industrial. The “wall of capital” seeking to be invested in commercial real estate continued to grow throughout 2014. After several years taking a backseat to the resilient multi-family sector, industrial product jumped to the top of most large investors’ target product rankings. Across the U.S., 19 consecutive quarters of falling vacancy rates along with construction levels still substantially below peak years have institutional real estate investors optimistic about the stability of industrial property in the coming decade. Steady domestic economic growth and the growing presence of e-commerce are projected to continue to drive tenant demand and bolster investors’ underwriting. While never a highly leveraged sector, industrial sale volume is undoubtedly aided by the availability of historically low debt capital. This is most apparent in a number of large, of multi-market Class B transactions that were purchased by private equity funds during 2014. These operators, which have been historically challenged to meet their yield requirements in the low beta industrial sector, pushed leverage (70 - 80 percent) to complete some of the largest deals the industrial sector since the recession. Over 25 percent of the total volume traded in Chicago during 2014 consisted of portions of larger, multi-market portfolio purchases. This portion of the sale volume tends to be older, Class B buildings that when offered in large scale (over $250 million), often multi-market portfolios, achieved pricing during 2014 that was 20 percent better than the prior year. While not as significant a factor, low priced debt is also driving price gains in Class A product. Class A cap rates have been pushed down below peak levels as low-leveraged, (40-50 percent) core purchasers meet aggressive total return targets by borrowing. A resurgent Chicago industrial market is the final significant factor CHICAGO INDUSTRIAL INVESTMENT SALES | HISTORICAL TRANSACTION VOLUME in the record sale volume of 2014. Lagging a national recovery that 40.030.0 $2,000 $1,600,000,000 began two years prior, Chicago was $49.83 35.0 $1,800 $1,400,000,000 25.0
in the top three (behind greater LA Millions $1,600 30.0 $1,200,000,000 Mllions ($) Mllions $69.94 $1,400 ($) MILLIONS
and Atlanta) markets in terms of net Millions (SF) $73.09 MILLIONS (SF) MILLIONS 20.0 25.0 $1,200 $1,000,000,000 absorption and thus falling vacancy $63.03 Total Sq. Ft. 20.0 $1,000 rates. Net rents have jumped 15.0 $800,000,000 Industrial Sale Volume 15.0 $59.20 $800 $600,000,000 significantly in coveted institutional 10.0 $600 10.0 $46.80 submarkets such as the I-55 $51.10 $400 $400,000,000 5.0 5.0 $200 Corridor, O’Hare and Central $200,000,000 0.0 $0 DuPage County. Many institutional 0.02008 2009 2010 2011 2012 2013 2014 $0 investors with large holdings in 2006 2007 2008 2009 2010 2011 2012 Total Sq. Ft. Industrial Sale Volume Price/SF Chicago went on offense to add to those holdings and increase the quality of their portfolios.
PRICING Prices of most of Chicago’s 1.3 billion square feet of industrial property rose significantly over the course of the past year. Increased construction costs, rising rents but still (historically) compressed rent levels pushed core Class A buildings to historically low cap rates but in-line with past cost basis. Cap rates for Class A assets fell approximately 50 basis points as 2014 progressed. At the close of the year, the Colliers sale team sold a six-year lease in a Class A building just west of O’Hare Airport at a 5.08 percent cap rate. A significant premium remains for Class A buildings in the most desirable submarkets in the Chicago area. At the year end, core investors are underwriting Class A opportunities to a 6-7 percent unleveraged IRR.
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Class B pricing also made a dramatic move upward in 2014 as new private equity capital flowed into this space looking to utilize the historically low cost of debt to reach their “mid-teen” total yield requirements. Liquidity for smaller, Class B buildings has returned, albeit at higher cap rates than peak years. Several large Class B trades were completed both as portions of larger, multi-market deals and Chicago-only portfolios. Cap rates for these trades range from 7.25 percent to 8.25 percent depending on a myriad of portfolio characteristics.
ACTIVE INVESTORS The record sale volume over the past year brought several large capital sources into the Chicago industrial market that had not invested here in several years. Private equity funds new to the market in 2014 include TPG, Greenfield Partners, Goldman Sachs and Power One. Traditional institutional $50.05M | 957,562 SF advisors continue to be active with RREEF, LaSalle Investment Management, TA Realty, Exeter, Cabot BOLINGBROOK PURCHASED BY TA REALTY and KTR Capital Partners all closing multiple transactions in 2014. In the REIT sector, Prologis and DCT Industrial and Stag were the most active acquirers in the industrial space while W.P. Carey and Grammercy Capital were active net lease-oriented REITS. We expect even more investor demand in 2015 as user demand continues to show great strength and a significant supply/demand imbalance remains in the industrial capital marketplace.
CHICAGO ONLY CLASS A TRANSACTIONS
SALE PRICE/ LOCATION SIZE (SF) BUYER SELLER COMMENTS $91.9 million Northern 6 Class A buildings; Not fully 1,373,973 Hillwood Metro Chicago Builders marketed $58.6 million CBRE Three building package; long 914,062 TA Realty Joliet, Itasca, Hanover Park Advisors term credit leases $51 million LaSalle Invest. New single tenant facility 898,560 Pizzuti $39.0M | 365,359 SF Romeoville Mgmt. leased to Pactiv MCCOOK $50.05 million 80% leased two building PURCHASED BY ARA 957,562 TA Realty A.E.W. Bolingbrook package $47.2 million Exeter Property Class A building leased for 10 824,624 WP Carey University Park Group years to JM Smuckers $39 million Bridge 15 year lease in new 365,359 ARA McCook Development construction
NOTABLE CHICAGO TRANSACTIONS | CHICAGO PORTION OF MULTI-CITY TRANSACTIONS
SALE PRICE /LOCATION SIZE (SF) BUYER SELLER COMMENTS $167.6 million Greenfield Class B Chicago portion of a 3,742,000 RREEF Metro Chicago Partners $400 million national package $75 million Class B Chicago portion of a 1,526,539 TPG Prologis Metro Chicago $375 million national package Chicago portion of a $1.6 $220 million (Est.) 1,018,900 Colony Capital Cobalt billion national acquisition of Metro Chicago Cobalt.
CHICAGO ONLY CLASS B TRANSACTIONS
SALE PRICE/ LOCATION SIZE (SF) BUYER SELLER COMMENTS Entity level acquisition of AUS $173.8 million Goldman/ 4,681,546 Mirvac Trust traded REIT involving 23 B/C Metro Chicago Brennan buildings $79 million Eight building, O’Hare centric 1,462,373 Westmount KTR Metro Chicago portfolio of B product $43 million Sparrow Hawk/ 921,000 Sitex Eleven building portfolio Metro Chicago Power One Purchase of six-building $28.5 million 486,212 Plymouth REIT Venture One portfolio by Plymouth as part Metro Chicago of a public REIT formation
P. 10 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
Multifamily
DOWNTOWN CHICAGO MARKET OVERVIEW Ending 2014 on a high note, Related Midwest’s $328 million sale of OneEleven to Heitman for a record $651,000 per unit exemplified the strong fundamentals that have continued to fuel the multi- family investment sales market in Chicago. 2014 featured $2.48 billion in transactions (up 8 percent from 2013); solidifying proof that investors see a continued ability to find profit in Chicago’s maturing multi-family market. As U.S. real estate continues to see an influx of new and foreign capital, Chicago has become a hot spot for institutional investors and developers alike. Overall, market conditions in 2014 were supported by determined and aggressive investor appetite and fervent competition for desirable core assets. Historically high occupancy rates and annual demand (8,941 units) exceeding annual supply volumes (4,379 units) across metropolitan Chicago pushed rents to a level well above that of employment growth in 2014. An expanding job market, income growth exceeding that of apartment rents, and increased urbanization will continue to fuel renter demand in the downtown area, which is expected to be supplemented by a robust development pipeline for at least the next four quarters. According to Appraisal Research Counselors, downtown apartment deliveries in Chicago are projected to remain elevated with annual completions registering 3,100 units in 2015. While rent growth for high end product has remained stagnant, there is an opportunity to increase rents in middle and lower end units. Stout hiring by local employers in 2014 and strong demographic-based demand for urban dwelling paved the way for significant increases in urban development as the Chicago market has continued to tighten. City capitalization rates varied widely in 2014 with an average of 6.3 percent, as urban core assets traded in the mid four percent to low five percent range, while most other submarkets averaged between six and eight percent.
2014 CORE DOWNTOWN MULTIFAMILY INVESTMENT SALES PRICE/ CAP YEAR DATE NAME ADDRESS PRICE UNITS UNIT RATE BUILT SOLD OneEleven 111 W Wacker Dr $328,000,000 504 $650,794 -- 2014 1/15/2015 The Seneca 200 E Chestnut St $74,875,000 254 $294,783 3.50% 1929 12/18/2014 K2 365 N Halsted St $215,000,000 496 $433,468 -- 2013 11/20/2014 55 W Chestnut 55 W Chestnut St $48,500,000 224 $216,518 -- 1966 10/30/2014 Chestnut Place 850 N State St $80,500,000 280 $287,500 3.70% 1980 7/18/2014 The Shelby 2300 S Michigan Ave $25,200,000 94 $268,085 5.13% 2013 7/1/2014 ONEELEVEN Atrium Village 300 W Hill St $50,000,000 309 $161,812 -- 1978 6/23/2014 111 W. WACKER DRIVE Apartments Trio 670 W Wayman St $42,000,000 100 $420,000 4.75% 2010 3/28/2014 Walton on the 2 W Delaware $132,000,000 189 $698,413 -- 2010 3/25/2014 Park Gold Coast City 860 N Dewitt Pl $18,937,000 147 $128,823 8.00% 1965 2/28/2014 Apartments 2015 FORECAST: CHICAGO METRO AREA 1313 Randolph 1313 W Randolph St $26,922,380 74 $363,816 4.00% 2012 1/23/2014 Annual Supply (units) 6,708 Annual Demand (units) 4,972 DOWNTOWN CONSTRUCTION ACTIVITY AND DEVELOPMENT PIPELINE Occupancy 95.5% 2014 Chicago saw an uptick in development as 2,750 units were delivered to the downtown core with Annual Occupancy Change -0.2% an additional 6,400 scheduled through 2016, according to Appraisal Research Counselors. The Annual Rent Change 3.4% aggregate of development has been focused in the Streeterville, River North, and Loop submarkets as Annual Revenue Change 3.2% empty nesters flock to the conveniences of urban living, young professionals continue to set up Annual Jobs Change 62,000 residences in downtown neighborhoods, and many young families make the decision to build a life in the city instead of making the move to the suburbs. All of these factors continue to promote downtown Source: MPF Research® residential development as there continues to be pent up demand for rental product in many of the
P. 11 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
city’s submarkets and as market metrics support prolonged new apartment deliveries. Demand for rental product in the city is projected to continue to outpace supply through 2016 as the migration of employment to downtown Chicago remains strong as companies try to attract millennials to the workforce.
CHICAGO CBD 2014 MULTIFAMILY CONSTRUCTION COMPLETIONS PROPERTY DEVELOPER UNITS FINISH
LOOP/SOUTH LOOP
Lake Street Studios Mark IV Realty 61 12/15
Catalyst Marquette Companies 223 10/14
Madison at Racine (The) Ascend Real Estate Group 216 10/14
1000 West Van Buren Michigan Avenue Real Estate Group 26 8/14
Infinite CA Ventures LLC 135 8/14
AMLI Lofts AMLI Residential 398 7/14
20 North Aberdeen Place Michigan Avenue Real Estate Group 27 6/14
73 East Lake M&R Development LLC 332 6/14
Aviation Lofts Concept Developers 49 5/14
OneEleven The Related Companies 504 5/14
22 North Aberdeen Place Michigan Avenue Real Estate Group 27 5/14
RIVER NORTH / STREETERVILLE
Scott Residences (The) JDL Development LLC/Harlem Irving Companies 71 10/14
Eight58 North Franklin Domus Group LLC 23 8/14
Hubbard Place The Habitat Company 450 1/14
LINCOLN PARK
Webster Square Sandz Development 75 9/14
NORTHWEST SIDE
Ravenswood Terrace Belgravia Group Ltd 150 10/14
1611 West Division 1601 W Division LLC 99 11/13
HUBBARD PLACE 404 N. KINGSBURY STREET
P. 12 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
CHICAGO CBD DEVELOPMENT PIPELINE PROPERTY DEVELOPER UNITS FINISH
LOOP/SOUTH LOOP
Block 37 CIM Group 694 10/16
200 North Michigan The John Buck Company 402 2/16
1000 South Clark Street JDL Development LLC 469 1/16
The Gateway Lennar 167 12/15
407 South Dearborn CA Ventures LLC/MCJ Development LLC 204 8/15
Arkadia Tower White Oak Realty Partners LLC/CA Ventures LLC 350 4/15
BLOCK 37 JeffJack Oak Residential Partners LLC/Private Developer 190 4/15 108 N. STATE STREET Circa 922 Focus Development 104 1/15
RIVER NORTH/STREETERVILLE
Optima II Optima 498 11/16
545 North McClurg Golub & Company LLC 490 5/16
Huron Tower CA Ventures LLC 90 12/15
Wolf Point Hines/Magellan Development Group LLC 510 11/15
625 West Division Gerding Edlen 240 7/15
805 North LaSalle Street Smithfield Properties 295 6/15
New City Structured Development LLC 199 6/15
Wicker Park Lofts Private Developer 41 6/15
212 West Illinois Illinois Franklin Associates LLC 188 3/15
845 North State Newcastle Limited 367 2/15
435 North Park DRW Holdings LLC 398 1/15
1615 W Warren Michigan Avenue Real Estate Group 52 1/15
LINCOLN PARK
Halsted Flats JDL Development LLC 269 7/15
Belden Stratford Laramar Group 297 1/15
SOUTHSIDE 805 N. LASALLE STREET Vue53 Mesa Development LLC 267 10/15
SUBURBAN CONSTRUCTION ACTIVITY AND DEVELOPMENT PIPELINE Significant large scale developments including Tapestry Naperville and The Springs at 127th have bolstered the continued development in the western suburbs, while construction has ticked up in north side suburbs such as Evanston, Glenview, Northbrook, and Deerfield. Overall, some 1,750 units were delivered across the Chicago suburbs in 2014. Development will continue with 2,285 units being delivered in 2015 and an additional 6,131 units planned according to Pierce Eislen. A new trend of urbanizing suburban municipalities will make up the bulk of new suburban multifamily construction in 2015 and beyond. Developers will look to mimic urban communities by offering immediate proximity to public transportation, shops, entertainment, and restaurants in hopes of attracting millennials and empty nesters with highly walkable suburban lifestyle centers.
HALSTED FLATS 3740 N. HALSTED STREET
COLLIERS INTERNATIONAL | P. 13 RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
SUBURBAN CHICAGO DEVELOPMENT ACTIVITY: PROPERTIES COMPLETED IN 2014
SUBMARKET PROPERTY NAME DEVELOPER UNITS FINISH
Glenview Midtown Square Trammell Crow Residential 138 12/14 Naperville Tapestry Naperville Lennar Corp 298 10/14 Arlington Heights One Arlington Stoneleigh Companies LLC 214 9/14 Algonquin Riverside Plaza 306 3/14 Wheaton Wheaton 121 Morningside Group 306 3/14 1717 1717 RIDGE AVENUE, EVANSTON Aurora Randall Heights Next Generation Development 146 1/14
SUBURBAN CHICAGO DEVELOPMENT ACTIVITY: PROPERTIES UNDER CONSTRUCTION
SUBMARKET PROPERTY NAME DEVELOPER UNITS FINISH
Residences of Orland Orland Park REVA Development Partners LLC 231 09/16 Park Crossings Northbrook NorthShore 770 Morningside Group 347 12/15 Park Ridge Park 205 High Street Residential 115 11/15 Deerfield AMLI Deerfield AMLI Residential 240 7/15 Carroll Properties Inc/Fifield Evanston E2 368 07/15 Companies Deerfield Woodview Ravine Park Partners LLC 248 6/15
TAPESTRY NAPERVILLE Vernon Hills Oaks of Vernon Hills REVA Development Partners LLC 304 5/15 2703 SHOW PLACE DRIVE Glenview Tapestry Glenview Lennar Corp 290 03/15
EMPLOYMENT According to the Bureau of Labor Statistics, the metropolitan Chicago area employment rate is 6.1 percent as of October 2014, down 2.4 percent from the previous year. Employment is expected to pick up in 2015 and MPF Research has forecast that some 62,000 jobs will be added in the metropolitan Chicago area in 2015, up from 55,000 in 2014. In 2014, the employment market started off slowly in the first quarter, then rebounded by adding 44,000 employees in the last four months of the year. A large concentration of these hires was in the professional services sector, which saw a 2.6 percent increase in September over the previous year.
WHEATON 121 121 N. CROSS STREET, WHEATON 2015 FORECAST While there’s some concern the multi-family market has peaked, many statistics indicate that the market is presently in the “sweet spot” of the cycle as the economy and CRE market will continue to improve for the next two to three years. In regards to 2015, the Chicago multi-family market will see a robust construction pipeline as over 3,100 units will be delivered in core Chicago submarkets. With supply levels well above historical averages, the market will experience limited rent growth in 2015, slightly above 3 percent market wide. However, occupancy is expected to remain stable in the coming year at 95-96 percent as job growth and millennials fuel demand, particularly in the downtown core.
NORTHSHORE 770 762 SKOKIE BOULEVARD, NORTHBROOK
P. 14 | COLLIERS INTERNATIONAL US: Growth led by prime assets in core Development remains limited, with only 66 million square feet of retail space currently under construction, a fraction of the historical peak of marketsRESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT 258 million sf in 2006. New supply is focused on infill projects in core markets, such as Los Angeles, where nearly 1 million square feet of Solid growth in employment and consumer spending have created space is in the pipeline, and Orange County, Calif., where 600,000 sf is a positive outlook for the U.S. retail market. With robust demand for under construction. prime space in top markets, and new supply still wellRetail below historical averages, the overall vacancy rate for U.S. retail properties fell 60 E-commerce continues to be an important sales driver, reaching $75 basis points year-over-year to 6.3% as of 2Q14. Still,THE the BIG segment PICTURE has billion in 2Q14, up 4.9% from the prior quarter and 15.7% year-over- to contend with seemingly contradictory ambivalencePaced in consumerby ongoing economicyear, recovery according as well to theas the Census strong Bureau. performance Although of high many street traditional markets, the confidence and the need to craft omni-channel strategiesglobal outlook to counter for retail is promising.retailers haveSolid struggledgrowth in employmentin part due toand online consumer competition, spending many has created are competition from e-commerce. a positive outlook for the U.S.increasingly retail market. embracing With robust the challengedemand for of prime e-commerce space in bytop devising markets, multi- and new supply still well belowchannel historical approaches averages, theto reachoverall consumers vacancy rate that for have U.S. comeretail propertiesto expect thefell The economic landscape is generally favorable. The U.S. economy 60 basis points year-over-yearenhanced to 6.3 percentconvenience as of secondthat web quarter + bricks 2014 and (Source: mortar Colliers can bring. USA Retail created more than 2 million jobs in the first nine Research).months of the Still, year, the segment has to contend with seemingly contradictory ambivalence in consumer and nearly 10 million since the start of 2010, accordingconfidence to the Bureauand the need toRetailers craft multi-channel have their eyesstrategies on the to 83-millioncounter competition “Millennials” from born e-commerce. between of Labor Statistics, with the gains expected to intensify through 2015. 1982 and 2000. This generation, which is larger than the Baby Boom, To combat competition from the internet, retailers are adopting new strategies to lure shoppers, such Another boost comes from falling gasoline prices, which puts more is expected to spend more than $200 billion annually starting in 2017, as using space as a showroom to create an “experiential” shopping environment. E-commerce affects money in consumers’ pockets. Consequently, retail sales (excluding leaving retailers with the tall task of developing a whole new consumer both traditional and luxury and, as such, merchants are being forced to become more creative in their auto) grew by a solid 4% year-over-year in September, according to the model that had previously been based on appealing to baby boomers. use of space. The challenge for retailers is to build a balanced approach between a robust e-commerce U.S. Census Bureau. Despite the positive economic figures, consumer presence and well-located physical store space, allowing the consumer to choose which medium they confidence has vacillated, leading the Conference Board’s index to As predicted in the Colliers 2014 1H Retail Outlook, investors continue to will use for purchases. tumble in September. focus on high-quality assets in prime locations, but a growing number Moving forward, retail storeare performance expanding intowill besecondary shaped byand format tertiary and markets location. in Demand search offor higher prime The mixed signs help explain why retail performancespace is shapedin core marketsby remainsyields. red-hot, Acquisitions leading ofto retailrent spikesproperties in key grew markets. by 80% However, year-over-year the demand in format and location. Demand for prime space in coreis cooler markets in overdevelopedis 1H14, secondary according and tertiaryto Real Capitalmarkets Analytics, where rents as retailare slowly property increasing, yields far but red-hot, leading to rent spikes in markets such as Manhattan,should remain San well below peaksurpass levels. other Some sectors retailers such either as apartments have been squeezedand CBD outoffices. of prime Although space Francisco, Los Angeles and Boston. However, the indemand core markets is cooler or inleft withsales a choice volume between continues high-cost to be prime dominated locations by orcore less-expensive markets, secondary and better overdeveloped secondary and tertiary markets, whereconfigured rents are “placemaker” slowly$49.12 spacemarkets in fringe accounted submarkets. for the lion’s share of the increase. Capital is plentiful increasing but remain well below peak levels. SomeThe retailers U.S. development either pipelinenot only is scarce.from institutional Development investors has recently and equity been funds,focused but on also core by urban have been squeezed out of prime space in core marketsmarkets or and left redevelopments with a individuals, of existing family space. trusts Landlords and local in many syndicates. U.S. markets Despite are a struggling decline in to capital fill choice between high-cost prime locations or less-expensivethe overhang and of better- supply fromflows the lastfrom construction Canada, cross-border cycle while investorssome retailers have are increasingly downsizing ramped due to up configured “placemaker” space in fringe submarkets.online competition. In 2015,their development activity in will the remain U.S., withlimited, European with only and 66 Chinesemillion square investors feet emergingof retail space under construction, aas fraction the most of theactive historical this year. peak of 258 million square feet in 2006.
SelectSELECT United UNITED STATES States RENTS: Rents: USD/SF/YEAR USD/SF/Year
Pioneer Place Brewery Blocks Portland 10% 10% Portland Newbury Street Boston
Sonerset Square Glastonbury Blvd Hartford Hartford
Madison Avenue Fifth Avenue Michigan Avenue New York New York Union Square Chicago San Francisco
$70 Santana Row Easton Town Center Walnut Street 17% San Jose Columbus Philadelphia
Las Vegas Blvd Las Vegas
Rodeo Drive $370 Los Angeles 10%
Kierland/Scottsdale Rd Peachtree Street Phoenix Atlanta King Street Village of La Jolla Charleston San Diego $185 Mockingbird Lane/Preston 0% Dallas
Rent/SF/YR > $500 BLVD Place Highland Village Houston Houston Park Ave Rent/SF/YR $150 - $500 $420 Worth Ave Orlando West Palm Beach Rent/SF/YR < $150 16% CityCentre Houston % Year Over Year Rent Increase Kalakaua Avenue - Waikiki Las Olas Blvd % Rent Unchanged Year Over Year Honolulu Ft Lauderdales % Year Over Year Rent Decrease Lincoln Rd Miami
11P. 15 | COLLIERS INTERNATIONAL Global Retail Highlights | 2014 | Colliers International Source: Colliers USA Retail Research RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
THE YEAR IN REVIEW Investors continued to focus on high-quality assets in prime locations in 2014, but a growing number have been expanding into secondary and tertiary markets in search of higher yields. According to Real Capital Analytics, acquisitions of retail properties grew by 80 percent year-over-year in the first half of 2014, as retail property yields far surpass other sectors such as apartments and CBD offices. Although sales volume continues to be dominated by core markets, secondary markets accounted for the lion’s share of the increase. Capital is plentiful not only from institutional investors and equity funds, but also by individuals, family trusts and local syndicates. Despite a decline in capital flows from Canada, cross-border investors have increasingly ramped up their activity in the U.S., with European and Chinese investors emerging as the most active in 2014.
Economic Overview 2014 was a year of further cap rate compression. Rising interest rates continued to be the main concern, but given the wide historic equity spread in capitalization rates and low inflation, the real estate development and investment market should remain stable even with a moderate increase in
Nationalinterest Third Quarterrates. 2014 Deliveries continue to increase despite being below their long-term average and vacancy and rental rates are also Nationaexperiencingl positiveRetail M trends.arket Retail Inventory Inventory & development 4% Deliveries Average Delivered SF 300.0
258.7 255.9 238.9 250.8 250.0 229.5 229.3 218.0 235.4 225.9 237.3 218.2 210.4 219.3 207.2 206.0 195.3 191.7 201.3 203.0 200.0 188.7 164.6 154.9 146.4 141.2 150.0 125.9 137.1 121.5
Millions S F 119.6
100.0
65.2 66.0 57.7 57.3 60.9 50.0
0.0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source:Source: CoStar Property® CoStar * Future deliveries based on current under construc tion buildings. Construction Activity Markets Ranked by Under Construction Square Footage Under Construction Inventory Average Bldg Size WhileMarket retail projects in the pipeline# Bld gs continueTotal GLA to increasePreleased from SF their Preleased trough % in All2011, Existin deliveriesg forU/C 2014 CAP RATE AND INTEREST RATES Northern New Jersey 60 5,230,172 4,370,489 83.6% 10,512 87,170 wereDallas/Ft still Worth well below the historical96 average.4,059,413 Of the projects3,092,366 currently 76.2% under construction14,095 for 2015,42,286 78 Boston 37 2,801,056 2,440,986 87.1% 12,410 75,704 percentWashington are preleased. 51 2,535,139 1,722,656 68.0% 13,634 49,709 Las Vegas 16 2,489,740 1,864,717 74.9% 15,350 155,609 Houston 47 1,941,344 1,579,390 81.4% 15,892 41,305 Los Angeles 61 1,823,820 1,540,441 84.5% 10,046 29,899 HISTORICALTampa/St Petersburg DELIVERIES 19 1,537,311 1,402,413 91.2% 12,130 80,911 Chicago 54 1,485,822 1,157,395 77.9% 13,681 27,515 CapitalizationLong Island (New York) Rate Spreads 32 1,383,787 1,043,287 75.4% 8,107 43,243 Miami-Dade Count y 32 1,372,505 727,797 53.0% 12,517 42,891 Orange County (California) 14 1,060,630 138,989 13.1% 14,082 75,759 RetailHampton Roadscap rates continue to 19compress; 984,301however, the841,794 risk premium 85.5% over treasuries13,127 received51,805 by Columbus 19 953,838 922,814 96.7% 12,410 50,202 investorsRaleigh/Durham was not affected in 322014 due to916,852 a corresponding 659,200 decreases 71.9% in treasury12,483 rates. The uptick28,652 in Atlanta 29 880,302 807,118 91.7% 13,778 30,355 treasuriesCleveland toward the end of21 2013 was801,129 656,542 82.0% 12,603 38,149 Westchester/So Connecticut 26 798,671 COMPOSITION523,428 65.5%OF ALL PROPERTY10,813 CPPI GROWTH30,718 reversedNew York City by a small degree due9 to positive732,554 564,649 77.1% 12,013 81,395 West Michigan 3 717,000 717,000 100.0% 9,917 239,000 laborDetroit reports and low inflation28 in early698,335 646,770 92.6% 10,515 24,941 Phoenix 39 671,799 520,943 77.5% 16,301 17,226 2014.South Bay/San Despite Jose historically low17 cap rates,602,378 402,759 66.9% 11,818 35,434 Charlotte 25 601,475 552,904 91.9% 12,408 24,059 theSalt Lakeequity City spread is healthy compared7 to563,156 421,906 74.9% 12,492 80,451 Source: Real Capital Analytics St. Louis 12 559,152 476,436 85.2% 14,545 46,596 itsMilwaukee historical trend. 18 536,971 397,649 74.1% 10,525 29,832 Orlando 9 536,077 501,706 93.6% 14,640 59,564 San Diego 16 503,295 279,970 55.6% 10,466 31,456 IncomeDes Moines Growth Vs. Cap Rate Compression14 470,390 361,351 76.8% 13,575 33,599 Broward Count y 19 459,625 432,880 94.2% 14,515 24,191 andAustin Pricing 30 446,065 294,997 66.1% 12,038 14,869 Sacramento 24 440,299 357,327 81.2% 12,358 18,346 Memphis 9 424,839 424,839 100.0% 10,906 47,204 WhenPalm Beach taking County into account all property11 types420,673 351,684 83.6% 15,871 38,243 Inland Empire (California) 13 415,664 328,515 79.0% 11,937 31,974 inHartford 2014, the Commercial Property9 Price404,316 396,211 98.0% 10,216 44,924 Philadelphia 28 389,251 237,127 60.9% 12,127 13,902 IndexHuntsville increased by 15.7 percent5 with 66383,809 383,809 100.0% 16,940 76,762 Denver 19 379,028 315,866 83.3% 13,535 19,949 percentKansas City of this increase due to6 cap rate356,569 322,414 90.4% 13,393 59,428 Baltimore 15 345,911 243,331 70.3% 11,472 23,061 compression.San Antonio Without much27 room for344,366 308,816 89.7% 10,010 12,754 Asheville 2 331,200 295,750 89.3% 12,745 165,600 furtherHawaii compression, long-term12 future327,992 160,240 48.9%Source: Real Capital15,441 Analytics/Moody’s 27,333 United States 1,478 53,269,558 41,464,963 77.8% 11,657 36,042 Source: CoStar Property® P. 16 | COLLIERS INTERNATIONAL 16 The CoStar Retail Report ©2014 CoStar Group, Inc. National Third Quarter 2014 National Retail Market Overview current quarter, 610 buildings with 12,605,899 square feet Cap rates have been lower in 2014, averaging 7.78% com - were completed in second quarter 2014, 898 buildings total - pared to the same period in 2013 when they averaged 7.95%. ing 14,839,216 square feet completed in rst quarter 2014, and One of the largest transactions that has occurred within 16,795,678 square feet in 879 buildings completed in fourth the last 4 quarters in the U.S. market is the sale of Beverly quarter 2013. Connection Shopping Center in Los Angeles. This 335,845 There were 53,269,558 square feet of retail space under square foot retail center sold for $260,000,000, or $774.17 per construction at the end of the third quarter 2014. square foot. The property sold on 7/9/2014, at a 4.80% cap Some of the notable 2014 deliveries include: 837 rate Washington Street, a 58,200-square-foot facility in the New Albany/Schenectady/Troy York City market that delivered in third quarter 2014 and is now The Albany/Schenectady/Troy retail market ended the 100% occupied and Main Street North Brunswick - Costco, a quarter with a vacancy rate of 4.5%. The vacancy rate was 148,000-square-foot facility in the Northern New Jersey market down over the previous quarter, with net absorption totaling that delivered in third quarter 2014 and is now 100% occupied positive 146,116 square feet. Vacant sublease space stayed Total retail inventory in the U.S. market area amounted the same at 54,822 square feet. Rental rates ended the third to 12,543,939,753 square feet in 1,076,090 buildings and 97487 quarter at $11.84, a decrease over the previous quarter. A total centers as of the end of the third quarter 2014. of three buildings with 27,300 square feet of space delivered to S2006-2014ales Activity the market, with 99,715 square feet still under construction at Tallying retail building sales of 15,000 square feet or larger, the end of the quarter. General Retai lU.S. Shopping retail Center sales gu Malres l fell during Total Market the second quarter 2014 in Albuquerque terms of dollar volume compared to the rst quarter of 2014. The Albuquerque retail market ended the quarter with a In the second quarter, 744 retail transactions closed with vacancy rate of 5.6%. The vacancy rate was down over the a total volume of $6,206,599,037. The 744 buildings totaled previous quarter, with net absorption totaling positive 127,505 42,189,879 square feet and the average price per square foot square feet. Vacant sublease space decreased to 58,278 equated to $147.11 per square foot. That compares to 703 square feet. Rental rates ended the third quarter at $13.11, a transactions totaling $6,679,844,942 in the rst quarter 2014. decrease over the previous quarter. A total of three buildings The total square footage in the rst quarter was 39,484,242 with 17,520 square feet of space delivered to the market, with square feet for an average price per square foot of $169.18. 57,429 square feet still under construction at the end of the Total retail center sales activity in 2014 was up compared quarter. to 2013. In the rst six months of 2014, the market saw 1,447 retail sales transactions with a total volume of $12,886,443,979. Anchorage The price per square foot averaged $157.78. In the same rst six With no new retail space being delivered to the market, months of 2013, the market posted 1,360 transactions with a and positive 7,128 square feet of net absorption, Anchorage’s 2009 3q 2010 1q 2010tot al3q volume 2011RESEARCH 1q of 2011 $9,837 3q 2012,54 REPORT8,041q 20123. The 3q price 2013 | 1qQ4 per 2013 2014 squa 3qre 2014 |foot 1qCHICAGO aver 2014 3q -| INVESTMENTvacancy rate went from 2.8% to 2.7% in the quarter. Rental odology page. aged $129.42. rates went from $17.48 to $17.80 during that time. At the end of the quarter, there was 15,000 square feet underway for increases in pricing will need to be fueled by NOI growth. NOI growth going forward will be dependent US VACANCY COMPARISON* future delivery. U.S. Vacancy Comparison* on real GDP growth and increased consumer sales – both of which were steady through 2014. In the Past Nine Quarters Past 9 Quarters short term, Adecreasingsheville vacancy and increasing rental rates will keep NOI moving in a positive Average Rental Rate Vacancy Rate direction. With no new retail space being delivered to the market, and positive 38,295 square feet of net absorption, Asheville’s $15.60 7.4% SALES VOLUMEvacan |cy US rate VS. weCHICAGOnt from 5.1% to 4.9% in the quarter. Rental $15.50 7.2% rates went from $12.61 to $13.57 during that time. At the end CHICAGO UNITED STATES $15.40 7.0% of the quarter, there was 331,200 square feet underway for $15.30 Actual Chg vs. Prior Actual Chg vs. Prior 6.8% future delivery. $15.20 VOLUME (MIL) 6.6% Atlanta
Dollars pe r Unit $15.10 Rate Percentag e n i 6.4% Prior 12 mos. (thruThe Q4 A 2014):tlanta retail market end$2,802.4ed the quarter-21% with a vacan$76,688.0 - 23% $15.00
ri ce cy rate of 8.8%. The vacancy rate was down over the previous P $14.90 6.2% Q4 2014: $803.5 6% $19,301.1 -2% Vacancy quarter, with net absorption totaling positive 836,826 square $14.80 6.0% NUMBER OF PROPERTIES feet. Vacant sublease space decreased to 799,993 square feet. $14.70 5.8% Prior 12 mos.Rent (thrual rat Q4es 2014): ended the third quart239er at $12.78, a de1%crease over 7,286 22% 2012 3q 2013 1q 2013 3q 2014 1q 2014 3q Q4 2014: the previous quarter. A total of s55even buildings-24% with 427,672 1,384 -24% Source: CoStar Property TOTAL SF *Select markets included in this chart Prior 12 mos. (thru Q4 2014): 13,872,902 -19% 410,313,430 10% 2 The CoStar Retail Report ©2014 CoStar Group, Inc. Q4 2014: 3,585,703 -12% 109,998,991 9% AVERAGE PRICE/SF Prior 12 mos. (thru Q4 2014): $223 -16% $201 17% Q4 2014: $313 49% $187 -11% AVERAGE CAP RATE (YIELD) Prior 12 mos. (thru Q4 2014): 6.5% -49 bps 6.8% -20 bps Q4 2014: 6.8% -5 bps 6.7% -16 bps Source: Real Capital Analytics
Throughout 2014, Chicago’s retail investment volume totaled over $2.8 billion across 239 properties (with an average $223 per square foot). This was a 21 percent decrease in sales volume from 2013 and a one percent increase in number of properties sold. Despite Chicago’s year-over-year decrease in total volume, U.S. total retail sales increased 23 percent to over $76.6 billion in 2014. Over 7,286 total properties were sold – a twenty-two percent increase from 2013 (with a national average of $201 per square foot). One of Chicago’s largest sales of 2014 came from the portfolio sale of four Mariano’s Fresh Markets purchased by the Loja Group. The Walnut Creek, CA-based real estate management and operations company purchased the portfolio for approximately $95 million from a former unit of Safeway Inc.
TOP US RETAIL MARKETS IN 2014 (SALES VOLUME THROUGH NOVEMBER)
MARKET SALES VOLUME NO. OF PROPERTIES SOLD
Northeast - Manhattan, NY $6.3 billion 267 West - Los Angeles, CA $5.3 billion 332 Midwest - Chicago, IL $2.5 billion 227 Southeast - Atlanta, GA $1.7 billion 171 Southwest - Dallas, TX $1.7 billion 186 Mid-Atlantic - Philadelphia, PA $1.06 billion 72
Source: Real Capital Analytics
Capital Flows For the second year in a row, capital flows coming into Chicago were dominated by private investors and publicly listed/REITs. Both of these buyer types saw an increase in capital flow from the previous year with private investors purchasing $1.2 billion in retail properties and publicly listed/REITs MARIANO’S FRESH MARKET investing $1.0 billion in the Chicago market.
P. 17 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
CAPITAL FLOWS
BUYER TYPES Chicago United States 4% 12% 14% 7%
15% 14% 45% 23%
46% 6121 N BROADWAY STREET CHICAGO 36% 35% Cross-Border Institutional Public Listed/REITs 33% Private 8% 43% User/Other 33%
43% 41% 33% 28% 18%
2014 FASHION OUTLETS OF CHICAGO 2011 2012 2013 2014 (YTD) ROSEMONT Rounded gures may not add up to 100% *Source: Real Capital Analytics
CHICAGOLAND’S LARGEST RETAIL INVESTMENT SALES 2014
ADDRESS / LOCATION SALE PRICE CAP RATE
840 N. Michigan Avenue $144,300,000 N/A Chicago, IL ($1,873.36/SF) The Promenade Bolingbrook $81,000,000 N/A Bolingbrook, IL ($143.65/SF) Fashion Outlets of Chicago $70,000,000 6.50% Rosemont, IL ($330.81/SF) Golf Mill Shopping Center $60,000,000 N/A 239 Golf Road, Niles, IL (Approx. $67.15/SF) 10 S. State Street $60,000,000 4.15% Chicago, IL ($1,129.82/SF) Pointe Plaza $50,300,000 5.85% 5700-5768 W. Touhy Avenue, Niles, IL ($260.61/SF) 1615 S. Clark Street $40,500,000 5.84% Chicago, IL ($617.68/SF)
CHICAGO’S LOWEST CAP RATE RETAIL INVESTMENT SALES 2014 ADDRESS / LOCATION SALE PRICE CAP RATE 57 E. Oak Street $14,900,000 1.50% Chicago, IL ($1,845.89/SF) 10 S. State Street $60,000,000 4.15% Chicago, IL ($1,129.82/SF) McDonald’s $1,100,000 4.54% 520 25th Avenue, Bellwood, IL ($334.45/SF)
P. 18 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
CHICAGO’S LOWEST CAP RATE RETAIL INVESTMENT SALES 2014 ADDRESS / LOCATION SALE PRICE CAP RATE Whole Foods Market $16,600,000 4.54% 225 W. Touhy Avenue, Park Ridge, IL ($433.71/SF) Walgreens $13,025,000 4.87% 6121 N. Broadway Street, Chicago, IL ($878.88/SF)
NOTABLE TENANTS IN THE MARKET 2014 Dominick’s left the market in 2014 and as a result Mariano’s, Whole Foods and Jewel capitalized on many of the vacated locations. Additionally, Uniqlo occupied 60,000 square feet at 830 N. Michigan Avenue and True Religion Brand Jeans took 1,437 square feet at 540 N. Michigan Avenue in Chicago.
ADDITIONAL NOTABLE TRANSACTIONS 2014 ADDRESS / LOCATION SALE PRICE SALE PRICE PSF 830 N. MICHIGAN AVENUE CHICAGO Lincolnshire Commons $40,304,856 $5,741.00 Lincolnshire, IL Fox Run Square $25,650,000 $179.00 Naperville, IL Poplar Creek $24,013,757 $151.00 Hoffman Estates, IL Paul Stuart, Inc. $18,900,000 $2,997.15 107 E. Oak Street, Chicago, IL Starbucks $14,100,000 $3,191.49 1003 N. Rush Street, Chicago, IL
WHAT WE EXPECT IN 2015 Improving demand drivers (i.e. job growth, GDP) will allow the retail investment market to continue to flourish in 2015. With strong fundamental tailwinds, retail properties will see continued transaction volume with supply constraint being the only mitigating factor, especially in core markets. A confluence of global factors should continue to steer foreign capital toward U.S. real estate, and sovereign wealth will continue to view marquee U.S. real estate as one of the best global options for steady yield. Private capital, including 1031 buyers, will continue to drive aggressive net lease cap rates and more conservative institutional investors as well as REITs will be driven further toward secondary and tertiary markets to chase yield. Moreover, with interest rate fears having faded substantially in the near-term and fueled by continued demand, we believe that cap rates will remain strong with room for some further compression in 2015.
P. 19 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
Seniors Housing 2014 SALES OVERVIEW Seniors Housing facility transaction activity in the metropolitan Chicago area in 2014 continued the strong pace established in 2013 with several mitigating factors. There were fewer transactions with a lower gross dollar volume noted in The National Investment Center (NIC) data. In 2013 there were 21 transactions for a gross dollar value of $357,101,824, while 2014 witnessed 13 transactions for a gross dollar volume of $276,003,909, a reduction of 22.7 percent. However, the average per unit value increased 15.3 percent from $ 155,171 to $ 179,030. Many of the high quality properties transacted prior to 2013, resulting in fewer transactions but at a higher per unit value. One sale SENIORS HOUSING CLASSIFICATIONS transaction of note is the Glenwood of Mahomet (Champaign) property. This facility was a part of a Widely accepted definitions of Seniors Housing, four-property portfolio of 199 units which closed for $30,239,000. The facilities other than Mahomet from those with least amount of care and were not considered in the Chicago market analysis. The other noteworthy transaction was the services to those requiring nursing care for Lincolnwood Place property in Chicago which closed in late 2014 for $84 million. The 299-unit facility residents, are Independent Living (IL), Assisted was valued at $129 million as Griffin American merged with NorthStar Realty Finance Corporation, Living (AL), which might or might not include an increase of 53 percent. Predictably, the newer, well-located facilities performed at the upper end Memory Care (MC) dedicated units and Nursing of this asset class. Care (NC). 2014 TOP SALES TRANSACTIONS
PROPERTY NAME / TOTAL BUYER PRICE / IL Independent Living SALE DATE LOCATION UNITS SELLER PER UNIT AL Assisted Living St. Andrew Life Center Health & Home Mgmt $9,500,000 211 12/22/2014 MC Memory Care Niles Presence Health $45,024 NC Nursing Care Grand View Alzheimers Center New Senior Investment Group $15,700,000 68 12/12/2014 Peoria Columbia Pacific Advisors $230,882 Lincolnwood Place NorthStar Realty Finance Corp. $129,021,600 299 12/3/2014 Chicago Griffin American Healthcare $431,510 The Glenwood of Mahomet Griffin American Healthcare $6,838,000 45 11/12/2014 Mahomet Division Plains LLC $151,956 Spring Mill Health Services Trilogy Healthcare Services TBD 109 10/17/2014 Merrillville Health Care REIT TBD Oakton Arms Generations Health Care Property $6,770,000 102 9/2/2014 Des Plaines Trust 10-30182-09 $66,373 Buchanan Meadows American Realty Capital $7,384,000 40 8/29/2014 Buchanan Lifehouse Health Services $184,600 Loyalton of Joliet Brookdale Senior Living $18,727,899 95 7/31/2014 Joliet Emeritus Corporation $197,136 Emeritus at Arborwood Brookdale Senior Living $8,471,254 54 7/31/2014 Granger Emeritus Corporation $156,875 Courtyard of Loyalton Brookdale Senior Living $7,491,160 38 7/31/2014 Joliet Emeritus Corporation $197,136 The Park at Plainfield CNL Financial Group $26,500,000 123 5/12/2014 Plainfield South Bay Partners Ltd $215,447 Rittenhouse Senior Living Rittenhouse Senior Living $15,069,766 72 4/4/2014 Portage PSLC/VSLC LLC $209,302 Rittenhouse Senior Living Rittenhouse Senior Living $20,930,230 100 4/4/2014 Valparaiso PSLC/VSLC LLC" $209,302 McHenry Villa Health Dimensions Group $3,600,000 113 2/3/2014 McHenry Trust 94734 $31,858
NEW DEVELOPMENT TRENDS As existing facility transaction abated somewhat, the infusion of new capital into the development sector fueled the search for appropriate sites. This activity is somewhat self-governing as new LINCOLNWOOD PLACE facility construction follows market assessment of unmet bed demand. This is one asset class that CHICAGO, IL SOLD FOR $431,510 PER UNIT does not usually allow replication of facilities in a trade area. Senior providers will not develop new
P. 20 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
capacity in markets already sufficiently served. One mitigating factor is the age of the current senior housing stock and the occupancy levels in the market. A market with high occupancies (90%+), high rents with older senior facilities might warrant new construction and supply. According to NIC/McGraw-Hill data, there are 37 facilities in planning or underway comprising approximately 2,885 new units to existing inventory.
2014 CONSTRUCTION PLANNING
FACILITY NAME SUBCLASS CITY, STATE STAGE UNITS
Uptown Supportive Living AL Chicago, IL Planning 246 Ryan Companies IL/AL/MC Algonquin, IL Planning 186 Ryan Companies MC Schererville, IL Planning 186 Bright Oaks Assisted Living of Wood Dale AL Wood Dale, IL Underway 180 Park Place Christian Retirement IL Saint John, IN Planning 156 Community of St John Supported Living Center for Seniors IL Merrillville, IN Planning 125 Sheltered Living Facility AL Downers Grove, IL Planning 120 Supportive Living Facility For Disabled AL Gurnee, IL Planning 120 Adults Harbor Retirement Associates AL/MC Naperville, IL Planning 120 Harbor Retirement Associates AL/MC Long Grove, IL Planning 120 Artis Assisted Living Facility & Parking AL Chicago, IL Planning 118 Garage Harbor Retirement Associates AL/MC Shorewood, WI Underway 104 Caledonian House Assisted-Living Pre- AL Riverside, IL 103 Residence Riverside, IL Planning Pathway Senior Living AL/MC Lake Zurich, IL Planning 100 Senior Assisted Living Facility (Phase 1) AL Pleasant Prairie, WI Planning 96 Senior Assisted Living Facility AL Grayslake, IL Bidding 96 Autumn Oaks Assisted Living Facility AL Wheeling, IL Planning 92 Spectrum Retirement Community Highland IL Highland Park, IL Planning 90 Park, IL Spectrum Retirement AL/MC Streamwood, IL Planning 90 Artis Senior Living MC Elmhurst, IL Underway 72 Artis Senior Living MC Bartlett, IL Planning 72 Artis Senior Living MC Mequon, WI Underway 72 Northbrook Inn Assisted Living/Memory AL Northbrook, IL Planning 69 Care Facility Robertsdale Senior Independent Living IL Hammond, IN Planning 61 Complex Azura Memory Care Living Facility AL Mequon, WI Planning 60 Lee Street Assisted Living Facility Des Pre- AL Des Plaines, IL 60 Plaines, IL Planning Assisted Living Center Countryside, IL AL Countryside, IL Planning 49 Memory Care Facility AL Merrillville, IN Planning 40 North Shore Assisted Living Dementia AL Northbrook, IL Planning 32 Care Facility (Phase 2) The Addison of Pleasant Prairie Assisted AL Pleasant Prairie, WI Bidding 30 Living Facility Assisted Living Facility AL Plainfield, IN Planning TBD Pre- Prairie Pointe Assisted Living Facility AL Sugar Grove, IL TBD Planning
P. 21 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
ELDERLY ADULTS AS A SHARE OF THE U.S. ACTIVE INVESTORS POPULATIONELDERLY ADULTS 2000-2050 AS A SHARE OF THE U.S. POPULATION Nationally and locally, this segment continues to be dominated by publicly traded and non-traded, 25% Baby Boomers Baby Boomers privately held REITs. Investment entities active in other real estate asset classes have joined the Start Turning 65 Start Turning 85 REITs, already invested in senior housing, to invest with senior living providers to gain market share. 20% Ages 85 or Older In some instances, the REITs and other investment entities are funding multiple new developments 2.3% with different senior provider partners in competing markets. As prime development sites are 15% identified and acquired, secondary, but not necessarily substandard, sites are being acquired. Again, 6.9% Ages 75 to 84 1.8% demographics and existing supply govern new facility locations. The REITs have directed their 1.5% 10% favored Operating Partners to locate appropriate sites for development in prime markets throughout 4.3% 4.2% the country. Chicago and its extended markets in southern Wisconsin, Northwest Indiana and downstate are benefiting from this activity. Senior developers such as Artis Senior Living, Ryan 5% 10.5% Ages 65 to 74 6.5% 7.1% Companies, Senior Lifestyle, Spectrum Retirement, Harbor Retirement, Autumn Leaves, and Pathway Senior Living are very active in this space. 0%
2000 2010 2020 2030 2040 2050 According to NIC MAP, the leading resource of senior housing data, this trend will continue based on Source: Congressional Budget O ce tabulations based on population projections reported several factors. The first Baby Boomers turned 65 in 2011, with an additional 10,000 reaching 65 in The 2012 Long-Term Budget Outlook (June 2012). www.cbo.gov/publication/43288. each day. This influx of mid 60’s population will continue to require supply for the foreseeable future, Note: Members of the baby-boom generation (people born between 1946 and 1964) started turning 65 in 2011 and will turn 85 beginning in 2031. albeit not in great numbers for at least another 10 years. Unlike their predecessors, these Boomers National Councilstay active of Real longer, Estate Investmentwith better Fiduciaries. health and All wealth andThe eventually nominal returnslook for on some the seniors type housingof senior properties housing within propertiesas in thethey NPI age, have closer been acquired,to home. at leastThe indesire part, onto be nearNCREIF’s family, friendsdatabase and (not theincluded communities in the NPI) they have haveoutperformed behalf of tax-exemptgrown with institutional has influenced investors—the their greatsearch majority in the sameduring markets the inlast 10which years they the havenominal resided performance in for returnyears. being pensionThe funds.growth As and such, development all properties ofare senior held in housinga facilitiesmeasurements is primarily for athe suburban-based broad NPI, as well phenomenon. as for the other fiduciary environment.This is based As of on the homogeneous fourth quarter of demographic2013, the NPI economicsindividual and NPI theindices. availability As of the offourth suitable quarter sites of 2013, for seniors CONSTRUCTION BY PROPERTY TYPE compriseddevelopment. 7,029 properties A with more a combined recent trend market is valuethe inclusion of ofhousing Independent properties Living have generatedas a component an annualized of the return new of 14.6 $353.9 billion.10 percent since the fourth quarter of 2003. This compares to an Chart Title Here Majority IL developments. This is a result of the improving economy and restoration of home based equity, allowing the sale of current residences and resultingannualized equity. return of 8.6 percent for the entire NPI. Seniors 1.40% 250 222 Exhibit 1.g 1.20% Seniors Housing has outperformed four other asset classes, over the last eight years. NCREIF200 Annualized Total Returns 1.00% Across Select Property Types in 1-, 3-, 5- and 10-year Periods | As of 12/31/2013 ANNUALIZED TOTAL RETURNS 0.80% 150
0.60% 100 NPI Apartment Hotel Industrial Office Retail Seniors Housing 0.40% 50 18% 0.20% 16% 0.00% 0 14% 1Q2013 1Q2014 3Q2013 4Q2013 3Q2014 2Q2013 4Q2014 4Q2012 2Q2014 12% Current Construction Construction vs. Inventory 10% *Includes all units/beds in properties under construction with a 8% majority of independent living service units, including CCRCs. 6% 4% Chart Title Here CCRC 2% 2.50% 25 0% 22 One Year Three Years Five Years Ten Years 2.00% 20 Source: AEW Research, NCREIF
1.50% 15 Exhibit 1.h 1.00% Ann10 ualiSUPPLYzed Total AND Equity DEMAND Returns Across Select REIT Types and the S&P 500 in 1-, 3-, 5-, 7-, and 10-year Periods | As of 12/31/2013 0.50% 5 Development of senior housing facilities is based on need-driven economics. Developers and their
0.00% 0 financial resources determine the senior housing need of a trade area, taking into consideration All REITs S&P 500 Healthcare REITs existing facilities and35% those in planning and development, resulting in a definable number of the 1Q2013 1Q2014 3Q2013 3Q2014 4Q2013 2Q2013 4Q2014 2Q2014 4Q2012 number of units in the facility and the anticipated performance based on penetration rates in the 30% Current Construction Construction vs. Inventory target population cohort. As of the fourth quarter 2014, there were 37 new developments in planning 25% or underway, resulting in 2,885 new units to the existing supply, an increase of 13 percent year to *Data included are formed from subsets of majority il, majority al 20% and majority nc property types. These data are broker out for your year. Senior housing developers and investors have focused the new developments primarily on 15% convenience. Assisted Living facilities, most with Memory Care components. Two senior developers of note, 10%
5%
P. 22 | COLLIERS INTERNATIONAL 0%
-5% -10% 1 Year 3 Years 5 Years 7 Years 10 Years Source: NAREIT; Bloomberg; NIC Research & Analytics
Section 1: Executive Summary 11 RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
Chart Title Here Majority AL Autumn Leaves and Artis Senior Living, develop stand-alone Memory Care communities of 46 to 80
7.50% 900 825 units, requiring smaller in-fill sites. Most seniors are able to age in place in their early Boomer years 800 7.00% with average age of Assisted Living residents in the low to mid 80s. Chicago based assisted living 700 6.50% facilities averaged 88.6 percent stabilized occupancy with an average rent of $ 4,800, monthly. 600 6.00% 500 According to NIC data, there were 123 properties, comprising 11,844 units of Majority Assisted Living 5.50% 400 in the Chicago market, in the 4th quarter 2014, an increase of 13 percent in the year. With properties 300 5.00% already in the pipeline, there will be sufficient capacity to in the Chicago regional market. Developers 200 4.50% are focusing on in-fill and smaller sites to meet unmet demand in specific submarkets. There are 100 limiting factors to this sustained growth, including avoidance of market duplication, availability of 4.00% 0 suitable sites and lack of municipal willingness to rezone properties to senior use from more intense 1Q2013 1Q2014 3Q2013 4Q2013 3Q2014 2Q2013 4Q2014 2Q2014 4Q2012 uses, in the improving economy. The availability of abundant capital for new development, the high Current Construction Construction vs. Inventory occupancies and rental rates of existing facilities and the downward pressure on existing facility cap *Includes all units/beds in properties under construction with a rates will all contribute to continued growth of new senior housing properties, at least through 2016. majority of assisted living service or memory care service units, As this segment develops, senior providers will look to in-fill sites in denser concentrations of including CCRCs. populations, sites that are in extended metropolitan areas, such as the Chicago-Milwaukee corridor and secondary markets such as Bloomington, Springfield and Champaign to sustain growth. Chart Title Here Majority NC 2014 INVENTORY 2.50% 700
572 600 2.00% 500
1.50% 400
1.00% 300 200
0.50% QUARTER # PROPERTIES # UNITS OCCUPANCY STABILIZED OCCUPANCY ABSORPTION INVENTORY GROWTH # PROPERTIES UNDER CONSTRUCTION UNDER # UNITS CONSTRUCTION RENT ANNUAL GROWTH RENT AVG 100 1Q2014 222 36,473 86.23% 87.05% 150 114 14 788 1.36% $3,309 0.00% 0 2Q2014 222 36,495 86.63% 87.29% 165 22 16 1,041 1.81% $3,298 1Q2013 1Q2014 3Q2013 4Q2013 3Q2014 2Q2013 4Q2014 4Q2012 2Q2014 3Q2014 224 36,829 87.45% 88.40% 593 334 15 948 2.18% $3,309 Current Construction Construction vs. Inventory 4Q2014 224 36,939 87.46% 88.20% 101 110 15 1,047 2.46% $3,347 *Includes all units/beds in properties under construction with a majority of nursing care service beds, including CCRCs.
Source: NIC MAP Data Service
P. 23 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2014 | CHICAGO | INVESTMENT
485 offices in 63 countries on 6 continents
> $2.1 billion in annual revenue > 1.46 billion square feet under management > 15,800 professionals
@ColliersChicago
CONTACTS: Office Tony Smaniotto, Executive Vice President [email protected]
Industrial Jeff Devine, Principal [email protected]
Multi-Family Brian Pohl, Executive Vice President [email protected]
Retail Peter Block, Executive Vice President [email protected]
Seniors Housing Jeff Hyman, Senior Vice President [email protected]
Accelerating success.
www.colliers.com/marketname