Richard Gatto, The Alter Group
(5 million square feet) involved tenants moving from one suburb to another.
Compare that trend to the relocations from the suburbs to the city, which totaled approximately 1.8 million square feet during the same period. The exodus of companies like Hillshire Brands and Motorola Mobility from the suburbs made it seem like the city was the only place to be for high-growth firms. The analysis also showed that firms moving from out of town to the area went to the suburbs rather than the city by a factor of more than 2 to 1: 385,000 square feet versus 160,000 square feet.
So, it’s no surprise that the suburban Chicago office market ended 2014 with the lowest vacancy rate since 2008. The 22.6 percent vacancy rate in the fourth quarter was down from 23.4 percent in the previous quarter, reports JLL.
A healthy 1.6 million square feet of suburban office space was absorbed in 2014, the highest since 2005. In fact, according to NAI Hiffman, the suburban office market absorbed more space than Chicago’s downtown market in each quarter of 2014. The truth is that suburban Chicago is part of a national trend of high-growth and blue-chip firms taking advantage of the soft market to create new iconic corporate offices. We see the same pattern in Phoenix’s Chandler and Tempe areas, the Central Perimeter in Atlanta and the Woodlands in Houston.
Savills Studley’s third-quarter office report called them “build-to-suit communities” with residential and retail offerings. Remember that the suburbs are not a single-product play either. Metro Chicago’s industrial vacancy rate, for example, fell to 8 percent, the lowest since first-quarter 2002, according to Colliers International.
Much of this was driven by demand from both traditional and online retailers for Class A logistics product. Southwest suburban Minooka scored one of the blockbusters of 2014 with an 849,691-square-foot deal with Ikea while Ferrara Candy Co. completed a deal for a 747,152-square-foot warehouse in Bolingbrook.
Ghost Town No More
In Chicago, the best proof of the narrative of new suburban corporate communities is the story of the four-building Kemper Lakes Business Center in suburban Long Grove. When insurer Kemper vacated the space in 2005, it left a ghost town that signaled dire predictions for the overall market. But owners Equus Capital Partners Ltd., along with the leasing team at Colliers International, didn’t flinch and rebranded it as a high-energy tech city.
Fresenius Kabi USA LLC, for example, signed a long-term lease for 262,291 square feet at Kemper Lakes Business Center and Acco Brands Corp., inked a deal for 189,371 square feet. Today, the campus is 93 percent leased and recently sold to New York-based Apollo Global Management, which purchased the park for $127 million in the fourth quarter after insurer MetLife walked away from a $130 million deal for the 1.1 million-square-foot complex.
It’s a huge windfall for Equus, which paid $30 million for the park, and a sign that investors see the suburbs as a better chance to achieve returns at a time when pricing downtown is at record levels.
There are essentially three types of corporate real estate transactions occurring in the suburbs: lease renewals, subleases and build-to-suits. Renewals included IBM’s 63,000-square-foot deal to stay in Schaumburg. The biggest sublease was AbbVie, a pharmaceutical research and development company, subleasing 490,000 square feet at 26525 N. Riverwoods Blvd. in the northern suburbs.
Meanwhile, one of the largest build-to-suit office projects launched in 2014 is still underway. Landlord Stonemont Financial Group LLC and construction firm Clayco Inc. secured more than $333 million to fund land acquisition and development for Zurich American Insurance Co.’s new North America headquarters in Schaumburg. The 750,000-square-foot headquarters is expected to be complete in late 2016. Jones Lang LaSalle arranged the financing.
This was a case where the credit of the tenant set the deal terms. Credit-tenant lease financing was used to acquire 40 acres of land. The loan did not require standard reserve funds due to the bond-type nature of the lease. The new building will accommodate the 2,500 employees and contractors who occupy the insurer’s current offices on American Lane in Schaumburg.
What’s Next?
The most interesting deal to watch moving forward will be the fate of the former 1.1-million-sq.-ft. Motorola Mobility campus in north suburban Libertyville. Rockville, Md.-based BECO Management purchased the campus for $9.5 million in July 2014. Engaging the same leasing team responsible for the lease-up of Kemper Lakes Business Center in Long Grove, BECO Management plans to turn the development into Innovation Park Midwest.
It’s a perfect example of developers branding master-planned developments as high-density urban/suburban environments. BECO has completed a similar office park at the former IBM campus in Charlotte, N.C.
— By Richard Gatto, executive vice president, The Alter Group. This article first appeared in the February 2015 issue of Heartland Real Estate Business magazine.