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t’s no secret that two of the hottest corporate real estate markets in America are Chicago and Boston. What you may not know is why. After nearly a decade of record US economic expansion, why do these two diverse and yet similar metropolitan markets continue to top the charts for corporate users of industrial and office space?
The answers have as much to do with the exploding high-tech growth of the New Economy in these two cities as they do the traditional factors such as geographic location and quality of life. In fact, as the New Economy shakeout of the dotcoms continues its cluster-bombing effect upon the over-valued, under-performing startups, look for these two metro markets to take the lead in the post-fallout diffusion.
“Diffusion,” a term used by Internet experts to describe the transition of technologies developed by the dotcoms into more traditional companies, could be the watchword for Chicago and Boston. Consider what’s happening on the ground right now in each city, and why.
Chicago: Logistics Facilities On Record Pace
Build-to-suit development activity in the Chicago metro area skyrocketed to 5.08 million sq. ft. (471,932 sq. m.) in the first half of 2000, a 25 percent increase from the same period in 1999 and the highest total in more than a decade, according to a report by The Alter Group (www.altergroup.com) of Skokie, Ill.
“The current industrial vacancy rate of 6.2 percent is indicative of the depth of the greater Chicago market, particularly considering the 8.8 million sq. ft. (817,520 sq. m.) of speculative and build-to-suit construction this year,” says Thomas Boyle, vice president of The Alter Group, adding that this record pace was expected to continue for the remainder of 2000.
“Office build-to-suits got off to a fast start too,” says Matthew Ward, also an Alter vice president. “After a year when the vigor of the speculative office market dampened build-to-suit projects by 93 percent, custom construction came back with an impressive 918,000 sq. ft. (85,282 sq. m.) in the first six months of 2000. Build-to-suit remains an attractive option for companies that have unusual technological or aesthetic requirements for their office space. Companies are increasingly aware that real estate represents a powerful ally in their mission to recruit and retain skilled employees and so undertake build-to-suits in order to provide the mix of elements in a work space that will best serve their human resource efforts.”
The largest deal of the first half of 2000 occurred when Suncast broke ground on a 715,000-sq.-ft. (66,424-sq.-m.) warehouse-distribution facility in Batavia. Two other notable transactions occurred in Will County: SLS Inc.’s 500,000-sq.-ft. (46,450-sq.-m.) industrial project in Romeoville and Spears Manufacturing’s 404,000-sq.-ft. (37,532-sq.-m.) building in Bolingbrook.
Driving a large portion of this growth is the ever-increasing need of companies with high-tech interests to find space to support their logistical needs. “The continuing trend in the Chicago area — which has more than 1 billion sq. ft. (92.9 million sq. m.) of industrial inventory — is the logistical support need of the industrial users,” Boyle says. “A majority of the logistics users are focusing on the I-55 Corridor in the Southwest Chicago market, which just five years ago was mostly farmland — and there are still tens of thousands of acres left to develop for industrial purposes. As the existing industrial parks elsewhere in metro Chicago get built out, there is no other place for the industrial space user to go.”
Another option, Boyle says, is for the industrial users to return to the southside urban core of Chicago and redevelop the old steel and rail yards, a trend being supported with significant tax incentives by the city of Chicago. Boyle notes that the city is offering a 50 percent property tax break over 10 years for qualified new occupants of industrial space.
Will, Cook and DuPage counties continue to lead the market in industrial space growth, Boyle adds, noting that Will County finished the first half of 2000 with its highest production of build-to-suit space on record (2.1 million sq. ft./195,090 sq. m.).
Trammell Crow’s (www.trammellcrow.com) mid-year 2000 report echoes Alter’s, noting that the “region’s healthy real estate market is a direct result of a strong local economy rooted in both traditional industries and cutting-edge technology.” One of those traditional industries — suppliers of automotive parts — received a huge boost in October when Ford Motor Co. announced plans for a supplier manufacturing campus on the city’s southeast side. The project is expected to generate an impact of US$1.3 billion over the next 10 years and create 1,000 new jobs. The Ford Chicago Manufacturing Campus will be located in the South Chicago community at 126th and Torrence Avenue, near Ford’s existing Torrence Avenue Assembly Plant.
The Ford project will benefit from more than $50 million in Illinois FIRST program funds that will pay for such projects as infrastructure improvements, brownfields cleanup and worker training.
The Chicago high-tech sector is also on a roll, thanks to the September announcement that Motorola will combine several offices scattered across the northern suburbs into a single office and research campus in the Lake County Village of Deer Park. The new site will initially accommodate 2,800 current Motorola employees, but continued corporate growth could mean the addition of several hundred new jobs over the next five years. The facilities will include two seven-story office buildings of 280,000 sq. ft. (26,012 sq. m.) each on a total of 69 acres (28 hectares).
“Being in Deer Park means we are well positioned to accommodate future growth in knowledge-based talent right here in Illinois,” says Merle Gilmore, Motorola executive vice president. “Today there are more than 24,000 Motorolans employed in Illinois — a number we’re very proud of — a number that marks Motorola as Illinois’ second largest private employer.”
These types of job announcements will not only bolster the need for more logistical support space in the greater Chicago market; they will further cement Chicago’s position as a magnet for high-tech corporate space users, says Boyle. “A strong retail economy is really what’s driving the logistics market,” he says. “All of the automotive suppliers are growing. The plastics companies and the injection molders are all growing here because they are supplying the Big Three US Automakers in Detroit. Also, metal refinishing is very strong in Chicago, and that is creating a need for space as well.”
Boston: Investor Interest Near Its Peak
If Chicago is becoming the logistical support capital of North America, then it can safely be said that Boston has become one of the premier office markets in the world. A first-half 2000 office market analysis of Greater Boston reveals that the metro area continues to rank among the national leaders in both occupancy and rental rates.
According to a report by Thompson Doyle Hennessey & Everest, the 100 million-sq.-ft. (9.29 million-sq.-m.) Boston office market is continuing to tighten, making the process of relocating, expanding and renewing more difficult for the tenant. “Companies currently exploring the marketplace for office space in Boston during the next six months will be faced with limited opportunities,” the report states. “An overall vacancy rate of 3.99 percent — with average asking rates for the scarce space of $37.60 per sq. ft. ($3.49 per sq. m.) — translates to an ever-increasing occupancy cost for office users. The prospects are even worse for tenants in search of class A tower space in Boston. That market has seen its vacancy rate drop to 2.2 percent with weighted average asking rental rates of $54.08 per sq. ft. ($5.02 per sq. m.).”
What is causing this unparalleled demand? “Traditionally, growth in the 1990s was fueled by the financial services giants such as Fidelity Investments, Putnam Investments, Wellington Management, State Street Bank, etc.,” the Thompson report states. “Although this industry currently accounts for a significant portion of the demand, other sectors have shown a strong appetite for office space. These include e-commerce, high-tech, advertising, publishing, telecommunications, services industries and the legal industry.”
With 4 million sq. ft. (371,600 sq. m.) of new office inventory set to come on line by the beginning of 2001, the Thompson report predicts that the pace of rent escalations in Boston should slow. “Indeed it may when the properties eventually come on line, but due to the long construction period and the continued robust local economy, it is expected that rents will continue to rise rapidly over the next 12 to 18 months,” the report notes.
The flip side of these rising rents is that many users are being driven out of the Financial District and investor interest is peaking. “Many of Boston’s trophy properties have traded or are on the market today,” adds the report. “Interest from a broad spectrum of investors has been brisk.”
Two local industries that have spawned clustering effects are telecommunications and biotechnology. “With an estimated 2 million sq. ft. (185,800 sq. m.) in demand, developers have scrambled to take advantage of this explosive growth” in the telecommunications and Internet service provider market, the report states. “Very particular in their needs, telecommunications users are quick to commit to space when the property meets their specifications. They will build the space with their own capital, provide substantial security, lease for long terms and carefully maintain the leased property.” Some of the properties in Boston that have recently changed their uses to telecommunications include the Macy’s One Summer Street building, Prudential Tower and 230 Congress Street.
Activity in the biotechnology/life sciences sector also continues to be brisk in the Greater Boston space market, as recruiting decisions dictate leasing and real estate decisions. “Many of the large pharmaceutical companies are planning expansions and/or new facilities in the Greater Boston market,” the Thompson report notes. “Boston University and Boston Medical Center’s Bio Square is the largest research and business square being built in Greater Boston. Amgen, CN-Biosciences, a division of Merck KgaA, Germany, and the Evans Medical Foundation have committed to the majority of space at the newest building at Bio Square.”
Events that may affect the Boston office market in the future include the further consolidation in the financial industry, the expiration of many state and federal leases, and the construction of more than 4 million sq. ft. (371,600 sq. m.) of new space.
What does that mean for the bottom line of corporate office space users in Boston? Conservative projections call for continued rental rate increases, higher parking fees, more competition for space, longer-term lease requirements and stiffer security requirements from tenants. In some cases, office tenants in Boston are being asked to fork over a full year’s worth of rent payments and all transaction costs just as a security deposit.
