Q4 2013 | INVESTMENT CHICAGO INVESTMENT MARKET OVERVIEW Office U.S. investors indicate 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 the next 12 months will be in the United States. Central and Latin America, as well as the UK, lag far behind. Within the U.S., global gateway cities remain the preferred targets for local and foreign investors, with the largest groups of buyers looking at the West Coast markets, followed by New York and Chicago. Nationally, job gains were steady, unemployment fell and fewer people looked for work. However, according to statistics from the U.S. Commerce Department, this recovery is the slowest and most sluggish recovery since World War II. Annual GDP, jobs, and population growth rates have in general been recovering at a snail’s pace, particularly in Illinois and Chicago with its pension woes and politics. According to Marquette University, office returns in the Midwest have significantly underperformed the U.S., particularly over the past ten years. On the surface it appears counter-intuitive that a property sector like office, which depends on space- consuming office tenants in the services sector, could be a top priority for investors. The reality is that office investors have abundant equity capital committed to the sector, and therefore continue to seek out opportunities in the metropolitan Chicago area. Existing owners have recognized this demand, and continue to replenish the pipeline of office investment offerings. Despite improving, but still weak real estate fundamentals and “more of the same” lethargy in the Chicago area’s overall economy, real estate investors continued to actively seek and acquire major office investments in the Chicago area in 2013 and the same is expected in 2014. Regardless of its economic and pension woes, 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. CHICAGO CBD There are several positive trends occurring beyond the oft-cited economic statistics that are fueling office investment activity in Chicago: • The acceptance of real estate as an alternative asset class is increasing • Long-term interest rates are expected to hold fairly steady over the next year • The overhang of OREO properties has begun to be sold or refinanced • Debt Lenders are becoming more risk tolerant and have eased underwriting criteria • Equity Investors have likewise been steadily less averse to risk and are seeking higher yield • There has been little new construction in the region www.colliers.com/chicago RESEARCH REPORT | Q4 2013 | CHICAGO | INVESTMENT In 2013, Chicago CBD office investments totaled $3.75 billion, a whopping 70 percent increase over the $2.2 billion of sales in 2012. The average price paid in 2013 equaled $228 per square foot, exceeding the average of $170 per square foot paid in 2012. This number jumped partly due to the significant number of Class A, West Loop properties that traded. Investors also have taken an interest in core-plus opportunities with relatively straightforward underwriting of near-term rollover. A few smaller, vintage assets also traded and will be re-purposed into alternative uses such as hotels or retail. Relative to the steady appetite for office investments - even in light of the woes dictated by economists – Chicago’s CBD offers numerous bright spots to justify acquisitions. Aside from those discussed above, 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 to the CBD 200 SOUTH WACKER DRIVE > A rapidly expanding technology sector including 1871, Motorola Mobility, Google and GoGo CHICAGO > Mayor Emmanuel’s “big projects” and “big headlines” have a positive effect on investor perception The year ended on a very high note with 11 properties, totaling over $2.1 billion, trading in a flurry of activity late in the fourth quarter. In what appears to be the largest transaction of the year, KBS REIT made its second jumbo purchase in the CBD by shelling out $425 million on the 1.4-million-square- HISTORICAL TRENDS Chicago CBD Office Investment Sale Volume foot office property at 500 West Madison Street. Earlier in the year, a venture of Mark Karasick of 601 W Cos. and Michael Silberberg of Berkley Properties completed the long-anticipated $415 million 4.0 $3.75 deal to gain control of the 2.2-million-square-foot Prudential I and II office complex overlooking 3.5 Millennium Park. Billions 3.0 $2.80 Just as Met Life had re-entered the CBD market in 2012 with its acquisition of 125 South Wacker 2.5 $2.20 $2.00 2.0 Drive, it followed up with the 2013 acquisitions of One North Franklin Street for $187 million and 550 Investment Sales 1.5 West Washington Street for $111 million. The latter property’s seller, Boston-based Beacon Capital 1.0 Partners, ended its brief absence in Chicago by acquiring 300 South Wacker in the third quarter. 0.5 $0.23 Foreign investment continues to be a steady barometer as well. Canada-based Manulife (operating 0.0 2009 2010 2011 2012 2013 in the U.S. as John Hancock) acquired its third CBD property in three years with the acquisition of 200 South Wacker Drice, and another Canadian firm – Ivanhoe Cambridge – acquired 10 and 120 S. Riverside for $360 million (with local partner Callahan), after committing $300 million earlier in the year to Hines’ 45-story River Point office tower in the West Loop. Korean Investors also continue to be attracted to Chicago, as evidenced by Mirae’s acquisition of 225 West Wacker Drive from Hines for $218 million, and Korea Post’s investment in 161 N. Clark Street for $331 million. CONCLUSION Even in light of the slow improvement in real estate fundamentals, sales of Chicago CBD office properties should remain strong in 2014. Several properties are being teed up to go to market while a few 2013 offerings, such as 200 South Michigan Avenue and 311 South Wacker Drive, are expected to close in the first quarter of 2014. The lack of new construction and ample supplies of cheap debt and equity, coupled with the long list of Chicago’s “intangibles,” should maintain the CBD’s widespread appeal and healthy sales pricing. P. 2 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2013 | CHICAGO | INVESTMENT CHICAGO CBD SALES | 2013 SELLER PURCHASER SF LOCATION VALUE PSF 601 West Associates, 111 West Melohn Properties 528,104 $135,000,000 $255.63 LLC Jackson Tier REIT/ 200 South Manulife (Hancock) 759,000 $215,000,000 $283.27 Pearlmark/EGI Wacker Drive GE Asset 500 West KBS REIT 1,457,470 $425,000,000 $291.60 Management Madison Street Harbor Group 300 South Beacon Capital Partners 512,436 $112,500,000 $219.54 International Wacker BGK Equities OBO 10 North Redico JV DRW Trading 80,228 $11,500,000 $143.34 Rosemont Realty Dearborn Bentall Kennedy Beacon Investment 20 North Clark 393,094 $63,750,000 $162.17 (US), LP Properties Street Callahan/Ivanhoe 10 South Tier REIT 684,911 $180,500,000 $263.54 Cambridge Riverside Callahan/Ivanhoe 120 South Tier REIT 684,962 $180,500,000 $263.52 Cambridge Riverside General Electric 181 West CBRE Global Investors 952,559 $302,000,000 $317.04 Pension Fund Madison Tishman Speyer MetLife 643,503 1 North Franklin $187,000,000 $290.60 CBRE GI/Korean Tishman Speyer 1,068,877 161 North Clark $331,250,000 $309.90 Consortium 400 S. JEFFERSON STREET Farbman Drake Real Estate 216 W Jackson HIGHEST PSF SALE IN THE CBD ($416.90) 171,876 $22,300,000 $129.74 Net Leased Corporate Headquarters Acquisitions, LLC Partners Blvd 68 E Wacker Aries Investors MB Real Estate 85,190 $9,500,000 $111.52 Place CBRE Global 190 South Tishman Speyer 797,750 $211,250,000 $264.81 Investors LaSalle 360 North Chetrit Oxford Capital 260,823 $53,000,000 $203.20 Michigan Avenue Kemper Corp AmTrust Realty Corp 526,158 One East Wacker $94,000,000 $178.65 Tribeca Holdings (Retail) / 625 North Hudson Advisors 343,072 $107,000,000 $311.89 Goldman Sachs / Golub Michigan Avenue (Office) MB Real Estate Ameritus 263,650 205 W Wacker Dr $22,750,000 $86.29 Deutsche Bank/ Hearn Company, Lynd, 896,980 875 N Michigan $140,000,000 $156.08 Northstar et al NorthStar Realty 180 N Stetson 601 W Companies 2,204,137 $415,000,000 $188.28 Finance Corp. Avenue Cole Real Estate 400 South Sterling Bay 233,869 $97,500,000 $416.90 Investments Jefferson JPMorgan Global Mirae Asset Global 650,812 225 West Wacker $218,000,000 $334.97 Real Assets Investments Harbor Group 111 West Shidler Group 579,848 $94,600,000 $163.15 International Washington 123 West CIBC Cagan Mangement 89,694 $4,850,000 $54.07 Madison Beacon Capital 550 West MetLife 372,597 $111,250,000 $298.58 Partners Washington P. 3 | COLLIERS INTERNATIONAL RESEARCH REPORT | Q4 2013 | CHICAGO | INVESTMENT SUBURBAN CHICAGO The suburban Chicago office market began to pick up in the second half of 2013, as several big lease deals were announced and tenant activity began to awaken from its slumber during the year. The suburban office market achieved its lowest vacancy level in over four years as 2013 came to a close, but at 20.5 percent overall vacancy, the suburban market is still a conundrum for most office investors. A strong knowledge of the individual submarkets and the key trends within it are key to investing in the suburban Chicago office market.