Commercial Real Estate Experts Predict Industry Trends for 2013

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What’s in store for the commercial real estate industry in 2013? With the real estate market on more solid footing and consumer confidence rising, many industry sectors appear poised for rebound and recovery, while others may have a cool-down ahead. Here are some predictions for the year to come from experts at commercial real estate companies including M&R Development, RMK Management Corp., Fifield Companies, Kiser Group, Prime Property Investors, Englewood Construction, HSA Commercial Real Estate, Bradley Business Center and Tandem Construction.

What’s in store for the commercial real estate industry in 2013? With the real estate market on more solid footing and consumer confidence rising, many industry sectors appear poised for rebound and recovery, while others may have a cool-down ahead. Here are some predictions for the year to come from several commercial real estate industry experts.

City Rentals Still Reign … For Now
With demand for apartments still going strong, developers are confident multi-family rental will continue its reign as the hottest commercial real estate asset through the end of 2013. “While a lot of economic indicators are starting to point to conditions that are favorable for buyers, we expect rental demand to stay on its current trajectory until there is more significant job growth,” said Tony Rossi, president of M&R Development and RMK Management Corp., which broke ground on two new apartment developments in Chicagoland this year.

Steve Fifield, president and founder of Fifield Companies, which is developing rental buildings in Chicago and the Los Angeles area, noted occupancy rates will stay strong in markets like downtown Chicago despite first deliveries for a number of new apartment projects hitting the market in mid- to late-2013. “Even with new units coming to market, there isn’t enough supply being added around the country to move the vacancy needle much,” he said, noting Los Angeles and Santa Monica, where Fifield has three new developments underway, as hot rental markets. "Class A rents will stay strong into 2014."

However, while developers expect rents to continue to increase in prime markets, Lee Kiser, principal of Chicago-based apartment brokerage firm Kiser Group, anticipates rent growth rates to level off to a more moderate pace by the end of 2013 in areas like downtown Chicago due to its current apartment construction pipeline. “There are more than 7,000 new rental units in the works in Chicago, and as these brand new buildings with state-of-the-art units and amenities hit the market, existing buildings will have to lower rents or offer concessions to be competitive,” he said. “Fall 2013 could be a tough time for renewals in older rental buildings in downtown Chicago.”

Kiser added that with values of condos and single-family homes stabilizing, and interest rates still at historic lows, rental demand overall could flatten as renters get over the “shell-shock” of the housing downturn and decide it’s time to buy. And Fifield noted that a trickle of new-construction condo developments are underway in prime markets like Manhattan and San Francisco, where inventories of unsold units are dwindling.

Suburban Rentals Stay Strong
Perhaps the brightest spot of the rental sector is the suburban apartment market, where rent growth is expected to outpace inflation for the foreseeable future, according to Lee Kiser, principal of Kiser Group. In the five-county Chicagoland market, few developers have taken notice and there are only 1,600 new rental units in the pipeline, compared to more than 7,000 in downtown Chicago. “Pre-crash, the suburban rental stock was depleted by condo conversions,” he said. “That, paired with continued consumer uncertainty in the residential home market, means apartment demand will continue to outpace supply.”

Barbara J. Gaffen, co-CEO of Northbrook, Ill.-based Prime Property Investors (PPI), noted that DuPage and Lake counties in Chicago remain particularly strong rental markets, thanks to a number of large corporations in these areas that employ a work force in the prime 25- to 40-year-old rental prospect demographic. All of PPI’s current suburban rental complexes are 100 percent leased. “The rental pool remains large and supply is limited, so we are actively looking to make additional acquisitions of multi-family assets in these markets,” said Gaffen.

The Return of the Private Investor
While 2011 and 2012 saw an abundance of “trophy” apartment buildings sold to institutional investors and large corporations, 2013 will bring the return of the private investor to the multi-family rental market, according to Lee Kiser, principal of Kiser Group. In Chicago, these investors will find opportunities in non-downtown neighborhoods, which are starting to see value recovery.

“We’ve already begun to see higher prices per unit for well-managed, stabilized assets in the better blocks of some of Chicago’s more modest neighborhoods,” said Kiser. “As more of the highly troubled assets are bought up and turned around, there will be fewer low price-per-unit comps and trades to artificially hold values down, meaning we’ll see a healthy increase in price-per-unit in 2013.”

Barbara J. Gaffen, co-CEO of Prime Property Investors, noted multi-family investors looking for high returns will continue to find opportunity in “value-add” plays, particularly with distressed assets in need of modest renovation that are currently on the market. “Updates like new kitchens and baths will significantly increase rents and cash flow resulting from a multi-family property, as well as the overall value of the investment,” she said.

In Retail, High-End and Value Play Nice
Across the board, consumers continue to seek high-end products and services at a perceived value. In the retail and restaurant sectors, that translates into opportunity for both high-end and value retailers.

“Look at Michigan Avenue as a microcosm of the retail sector,” said William Di Santo, president of Lemont, Ill.-based Englewood Construction, a national commercial construction firm. “High-end stores like Neiman Marcus, Saks Fifth Avenue and Burberry are renovating their current locations or opening new stores along the Mag Mile. Meanwhile, value-oriented chains like Marshall’s and Nordstrom Rack are succeeding right alongside them.”

DiSanto added that uncertainty lies with middle-market retailers like Gap, Express and Talbots. “Watch those chains as a real barometer of the retail real estate market in 2013,” he said.

Infill is Where the Action is
Ground-up retail seemed nonexistent for a few years, after numerous developers and retailers got burned chasing the residential boom into the far reaches of suburbia.

That has changed as retail development is back in some mature markets, where developers and retailers are more confident in existing population bases. This is evidenced by the current construction of a Walmart in Skokie and a Costco in North Riverside.

"We will see more new development in infill areas this next year," said Michael Havdala, senior vice president of retail brokerage firm HSA Commercial Real Estate. "Where the big stores go, expect smaller retailers to follow. These anchor-tenants will spawn new restaurants and complimentary retailers around them."

Havdala said that many of these restaurants will also roll-out new fast casual concepts, as most will have to downsize from their traditional store models.

"In some of these mature markets, the two-acre, free-standing pads aren't available, or, they are simply too costly for the finances to work," said Havdala. "As a result, many restaurants will willingly take end cap spaces in strip centers, effectively shrinking their footprint and their costs."

He noted that Red Robin and Famous Dave's are both experimenting with smaller locations and new store concepts to meet this trend and gain access to these stable environments.

The Drought Ends for Industrial Spec Space
As vacancy rates continue to creep down and demand in the 20,000-100,000-square-foot range continues to escalate, speculative development may be just around the corner. Robert Smietana, vice chairman and chief executive officer of HSA Commercial Real Estate, noted that industries such as aerospace, packaging, e-commerce, pharmaceuticals and distribution/logistics are growing, and finding industrial space to accommodate these users is becoming more difficult.

“Between growing demand and the fact that financial institutions are more comfortable with the current economic environment, we’re seeing more modest speculative developments under serious consideration for the right sponsors,” he said.

In Chicagoland, where vacancy rates are at their lowest level since 2008, Smietana pointed to Lake County as one potential hot spot for new industrial development. The area is home to several large corporate campuses including Baxter and Abbott, which in turn attract third-party suppliers that want to be near their primary customers. With existing industrial stock in Lake County limited and aging, demand from these suppliers could drive development of new distribution and light manufacturing space for the next few years.

Office Space: The Next to Heat Up?
While there will continue to be uncertainty in the office space market through 2013, meaningful job growth could spur new office construction in major urban markets over the next few years. “There’s been virtually no new office construction for six years, so major downtown areas are approaching full occupancy,” said Steve Fifield, president of Fifield Companies. “A big employment jump in business service sectors could be the tipping point for new office space demand.”

Many firms will also seek office space that offers an alternative to traditional urban locations, as well as environments that foster a culture of creativity. Bradley Business Center, a new 350,000-square-foot joint venture of Centrum Partners and Hansen Realty, is one such alternative, drawing cutting-edge technology and creative-driven firms as tenants with top-flight amenities, flexible space, and a prime location in Chicago’s North Center neighborhood. BrightFarms, which has leased 45,000 square feet of rooftop space to build a hydroponic greenhouse farm, is an example of the innovative companies the space is attracting.

“We’re creating a new job center that’s incredibly convenient to the popular Chicago neighborhoods that young, educated workers favor,” said Michael McLean, senior vice president of Centrum Partners. “The building itself offers the amenities employers know will appeal to their target employee, from a fitness room and outdoor basketball court to bike racks and charging stalls for electric cars.”

Negotiated Bids Gain Ground
In the commercial construction arena, contractors say the current financing climate is making negotiated contracts an attractive alternative to competitive bids for clients who are more focused than ever on staying within budget.

“The days are long gone when a client could just go back to the lending institution and get more money if change orders came up,” said Dimitri Nassis, CEO of Chicago-based Tandem Construction, who said his firm’s percentage of revenue from negotiated versus competitive bids has steadily risen since 2010. “With a negotiated bid, the contractor works with the client to set the budget up front, and everyone involved is responsible for hitting their number.”

Negotiated bids are becoming more attractive from the contractors’ perspective too, as the economic downturn resulted in an increase in the number of firms competitively bidding on projects. “Firms don’t necessarily want to throw their hat in ring when there are 15 other contractors going after the same job,” said William Di Santo, president of Englewood Construction. “And on the flip side, too many developers got burned during the recession by pick-up-truck contractors with low bids. When it comes to short deadlines or complex projects, clients want to go with a proven entity.”

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Editor’s Note:            
For interviews or more information, please contact Sarah Lyons at slyons(at)taylorjohnson(dot)com or 312-267-4520.

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Fifield Cos. will deliver the 496-unit luxury apartment tower K2 in Chicago in the first quarter of 2013. Steve Fifield, chairman and CEO, noted that occupancy rates will remain strong in 2013 and that there is not enough new supply being added to the market to increase vacancy.Fifield Cos. will deliver the 496-unit luxury apartment tower K2 in Chicago in the first quarter of 2013. Steve Fifield, chairman and CEO, noted that occupancy rates will remain strong in 2013 and that there is not enough new supply being added to the market to increase vacancy.K2 ExteriorChicago's suburban apartment market is expected to be a bright spot in 2013 as rent growth is expected to outpace inflation for the foreseeable future. Barbara J. 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