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The Chinese Moto into Chicago

Monday, February 3rd, 2014

It’s a strange experience to attend a tech conference like I did last Thursday and have no one — not the audience or the speakers — mention the biggest tech story of the year. It’s a little like attending a family reunion and having nobody comment on your Aunt Mary’s 25-year old boyfriend.

Motorola Mobility is being sold by Google to Chinese computer powerhouse, Lenovo. You remember them — the company that bought IBM’s ThinkPad division in 2005. They paid $2.9 billion and it’s for one reason: to enter the smartphone war against Apple and Samsung. It’s the largest ever deal by a Chinese tech company (although a relative bargain when you consider that Google paid $12.5 billion for Motorola — primarily for its patent portfolio which it will license to Lenovo.)

For Chicago, the sale comes weeks away from the biggest real estate move of the last year: Motorola moving more than 2,000 workers into the Merchandise Mart and becoming the biggest tech employer downtown. Lenovo says it will all move ahead with no plans for layoffs.

The reason a Chinese tech behemoth with resources pays for an American company is twofold — brand and know how. “Motorola brings a strong brand, brilliant engineering and strong relationships with carriers and retailers.” said Lenovo CEO Yang Yuanqing.

In a blog for Crain’s Chicago Business, John Pletz spells out the challenges: Today, it (Motorola) has just 1 percent global market share, putting it in 16th place among the top cellphone vendors, according to research firm Strategy Analytics Inc. That’s down from No. 2, with 22 percent share, in 2006, when Motorola’s Razr phone was the must-have device.

After the acquisition, Lenovo will be No. 3, with 6 percent of the smartphone market, which accounts for most of the cellphone industry’s profit, according to Strategy Analytics. Samsung is No. 1 with 32 percent of shipments, followed by Apple, with 15 percent.

Chicago’s Tech Boom

Thursday, September 6th, 2012

Chicago’s high-tech community wants to lure the area’s start-up companies back to 1871 — the year that the Chicago Fire burned the city to the ground.  1871 is the name of a 50,000 SF space on the Merchandise Mart’s 12th floor designed to house entrepreneurs seeking a collaborative and flexible work environment.  The name reflects the spirit of innovation that rebuilt the city after the 1871 fire, said Kevin Willer, president of the Chicagoland Entrepreneurial Center (CEC).

The non-profit CEC operates the space with support from venture capitalist J.B. Pritzker and the State of Illinois, as well corporate sponsorship from companies such as Comcast and Cisco Systems, Inc.  Willer and Matt Moog, founder and chief executive of Viewpoints Network,  led efforts to create a focal point for Chicago digital technology start-ups.

Chicago is a national leader in start-up companies.  Writing in Forbes, Kelly Reid notes that a new start-up is formed in Chicago every 48 hours.  “It takes about 10 years for a first wave of start-ups to succeed or fail, and those that make successful exits begin investing their own money and mentoring the next generation.   According to Built in Chicago, it takes about two of these cycles — or 20 years — to build an entrepreneurship community.”  Chicago is “right at the beginning of the boom.  There were about as many digital start-ups founded in 2009 (72) as there were in the prior two years (73).  In 2010, the trend continued; 107 between 2008 and 2009 and 98 in 2010.   The 193 companies founded in 2011 buck the trend; there were only 170 companies founded in the prior two years, indicating very positive growth. 193 start-ups in a year amounts to a new company founded every two days.”

According to USA Today and the National Capital Venture Association,  San Francisco (not surprisingly) is the nation’s leading home of start-up tech firms, with Boston occupying second place.  These are followed by New York, Los Angeles, Washington, D.C., San Diego, Chicago, Boulder/Denver and Seattle.

Employment growth in the high-tech sector is fueling strong rental rate growth and declining vacancies in tech-oriented office markets of San Francisco, New York and Seattle, among others, according to CB Richard Ellis.   “The strengths of these tech-centric office sub-markets, with the strong rental rate growth and declining vacancies, are major factors supporting the overall office market recovery,” said Colin Yasukochi, CBRE’s director of research and analysis.  According to Yasukochi, “With the high-tech economy growing nearly six times faster than the national average, we expect that these sub-markets will continue to outperform.”

Willer points out that the CEC isn’’t an incubator, but a collaborative workspace where entrepreneurs can bounce ideas off each other.  Venture capital and angel investors also have a presence at the CEC.  “Economic development is about creating new enterprises as well as supporting corporations that are already here,” Willer said, noting that he hopes 1871 will become part of the Chicago’s tech “ecosystem”.  Chicago  start-ups raised $1.45 billion raised in 2010, the majority from Groupon  which is evidence that there is an energetic tech community in the city.

Demand for 1871 space exceeds the supply.   “On the first day we had 50 applications from companies come in,” said Steve Collens, senior vice president with The Pritzker Group. “They continue to pour in,” he said.  “The reality is that there are just very few co-working spaces here.  People are scattered from Ravenswood to River North to the West Loop.”

Chicago’s largest tech company lease in seven years was 572,000 SF, which Google leased for its Motorola Mobile subsidiary, also in the Merchandise Mart.

Large Firms Driving the Downtown Boom

Wednesday, August 1st, 2012

Here’s a little news to buck up the real estate mavens weathered by the daily diet of recessionary news: Google has signed the largest lease in downtown Chicago in 7 years.

It is a familiar story – a marquee firm relocating downtown because of the hip, cosmopolitan appeal and amenities of a CBD — but it does contradict the usual pattern of a recession. Nationally we’re seeing large firms (more than 500 employees) moving downtown to compete for young workers with the effect that the CBD is doing way better than the burbs. According to National RE Investor (NREI) Magazine, since the advent of the labor market recovery in the first quarter of 2010, large companies have created 1.06 million jobs while small companies have created 823,000 jobs. Talk to an economist or your cycle-tested real estate broker and they will tell you that it’s not how things usually work.

In every recession we’ve tracked, the small to medium-sized businesses (SMBs) have led hiring during the first stages of a recovery only to be surpassed by large firms ramping up during the latter stages of a comeback.  According to NREI, during the economic recovery in 1992 and 1993, hiring by small companies outpaced hiring by large companies—roughly 1.95 million jobs versus 1.52 million jobs. Over the next seven years before the economy entered another recession, the trends reversed. From 1994 through 2000, large firms created 11.23 million jobs while small firms created 7.36 million jobs.

The same thing happened in the economic recovery of the early 2000s: During 2003 and 2004 as the labor market began to recover, hiring by small firms of 1.44 million jobs outpaced hiring by large firms of 592,000 jobs. During this period suburban vacancy fell by 35 basis points while CBD vacancy rose by 130 basis points. But then it reversed. Once again, large companies generated more jobs than small companies —  3.09 million jobs versus 1.89 million jobs.

So, why is it different this time? The answer is credit. Small firms can’t tap the capital markets the way they used to because banks are still cautious. As a result, they need to keep their real estate costs low which means remaining in suburban space. Concurrently, large firms have gone through a huge cost-cutting period which has warranted the restacking, redesign and relocation of their workspaces to utilize space more productively with fewer but more highly skilled workers. And invariably, it means being downtown. Looking at the 10 largest leases of the last 12 years, we see the types of firms that rely on younger, highly educated workers who want to be downtown  — law firms, large financial consulting firms and tech giants.

Student Housing Breathes Relief

Tuesday, July 24th, 2012

On June 29, Congress avoided doubling interest rates for new federal student loans. Republicans and Democrats came together to keep interest rates on new Stafford loans, which are subsidized by the federal government, at 3.4 percent. The rates were set to double in July. It’s good news not just for matriculating freshmen but also for the student housing sector, including developers and REITs which rely on a funded student population.

The news comes at a time when the student housing sector is thriving. Budget shortfalls coupled with lengthy procurement and contracting processes within public and private universities have created a need for real estate firms that can own and operate residential facilities (usually under a long-term ground lease if the facility is on campus) so schools can keep their cash for core functions.  The largest student housing REIT, American Campus Communities (ACC), with a market cap of around $3.36 billion, acquired seven properties worth a total of approximately $250 million in the last 12 months. At Arizona State University, the company has already invested $350 million and privately owns the school’s honors college, an on-campus dormitory and a student apartment complex.

Other players are Education Realty Trust (EDR) with a market valuation of about one billion dollars, and Campus Crest Communities worth $322 million. According to National Real Estate Investor, Nashville-based EdR is in discussions with the University of Kentucky to completely revamp the school’s student housing portfolio. “The entire industry is buzzing about the implications this one deal might have on other projects,” according the report.  Charlotte, N.C.-based Campus Crest, meantime, has six new student housing properties under development, three of which are wholly owned by the REIT and three of which are owned by a joint venture. The six projects have a price tag of nearly $157 million.

Loudoun is the Nation’s Wealthiest County

Wednesday, May 2nd, 2012

Ten of the 15 richest counties in the United States are located in Washington, D.C.’s Virginia and Maryland suburbs. According to 2010 Census Bureau data, with three counties exceeding the $100,000 mark, life seems pretty good in these areas, even as the U.S. median household income declined 2.3 percent between 2009 to 2010.  Even so, the richest counties boast a median income that is about double the national average of $49,445.  Only one county west of the Mississippi River – Douglas County in Colorado – made the list.  The other counties are in the New York and New Jersey suburbs.

Loudoun County, VA, with a median household income of $119,540, takes first place. With a median household income that is $16,000 higher than second-place Fairfax County, VA, Loudoun has trounced the competition on its way to becoming the richest county in America.  Loudoun borders both West Virginia and Maryland and is the site of Washington Dulles International Airport.  The Appalachian Trail runs along its western border, and the area was principally agricultural until the airport was built in the 1960s.  The population has continued to increase since then, with the area nearly doubling between 2000 to 2010. The poverty level is just 3.2 percent.

As of the 2010 Census, Loudoun County is estimated to be home to 312,311 people, an 84 percent increase over the 2000 figure of 169,599.  That increase makes Loudoun the fourth fastest-growing county in the United States.  Loudoun County is home to world headquarters for several high tech companies, including Verizon Business, Telos Corporation, Orbital Sciences Corporation, and Paxfire.  Like Fairfax County’s Dulles Corridor, Loudoun has economically benefited from the existence of the airport, which is mostly located in the county.  Western Loudoun County retains a strong rural economy and the equine industry has an estimated revenues of $78 million.

Second place Fairfax County, VA, is one of the largest counties in terms of population (1,081,726 residents in 2010), but it is also notable for its high-priced real estate.  Fairfax is one of only two counties to break the half-million mark in home values, with the median value of $507,800 for an owner-occupied home.

In descending order, the next richest counties in the Washington, D.C., area are Howard County, MD, with $101,771; Arlington County, VA, with $94,986; Stafford County, VA, with $94,317; Prince William County, VA, with $92,655; Montgomery County, MD, with $89,155; Calvert County, MD, with $88,862; St. Mary’s County, MD, with $88,444; and Charles County, MD, with $87,007.

Eugene Lauer, Charles County’s Economic Development Director, said he is not surprised that southern Maryland counties made the list.  “I think it’s great.  A lot of people may not know this, but we have ranked fairly high for a number of years,” he said.  “We know we have an affluent, highly-educated, qualified workforce in Charles County, and we have excellent students who will be in the workforce of tomorrow,” according to Charles County Commissioner Candace Quinn Kelly.  Lauer said Charles County’s low unemployment rate also helps drive up its ranking.  “Our unemployment rate is 5.4 percent.  That’s fourth or fifth best in the state, better than Maryland as a whole, which is 6.7 percent, and the U.S., which is 8.5 percent,” he said.

Dean Frutiger of the Council for Community and Economic Research though has a serious caveat.  “To rank something based on simply income does not take into account real cost of living issues,” said Frutiger, who calculates the nationwide Cost of Living Index.  After you factor in the local costs for items like housing, utilities, groceries, and transportation – D.C. metro area incomes go down by about 43 percent.  According to Frutiger “That $119,000 a year median income in Loudoun County, reduced by the cost of living index, means you’re down to $83,000.”

Half of Companies Plan to Hire New Employees in 2011

Tuesday, December 28th, 2010

Half of Companies Plan to Hire New Employees in 2011Approximately half – 47 percent – of American companies whose sales range from $25 million to $2 billion say they will hire more employees in 2011, according to a Bank of America survey of chief financial officers (CFOs).  The new number represents a significant uptick over the 28 percent who planned to hire new employees one year ago.  The news is not all good – 61 percent of companies who do not plan to hire said there is still reduced demand for their products or services.  The survey of 800 firms covered a broad range of industries throughout the United States.

The CFOs are unsure that the economic recovery will last, as well as being concerned about the impact of the healthcare reform law that Congress passed in March of 2010.  Their caution is evident in the fact that – on a scale of one to 100 – the CFOs gave the economy a rank of 47.  This represents a slight increase over the 44 level recorded last year.  An addition 64 percent expect their companies’ revenue will grow in 2011; 55 percent anticipate margin growth.

Despite the challenging economic climate, many CFOs have growing confidence that their companies have weathered the worst of the storm and are poised for expansion,” Laura Whitley, Bank of America’s global commercial products executive, said.  “Although concerns about the economy remain, the increase in CFOs who expect to hire employees could be crucial to improving the nation’s unemployment rate.  It’s exciting to see a more positive mood.”  Yet, she noted, the recovery has been slower than expected.  “When talking with businesses we hear it all the time.”

Downtown Chicago Office Market Showing Signs of Life

Tuesday, October 12th, 2010

Downtown Chicago Class A office vacancies now just 14.2 percent. Chicago’s downtown office market started its long-awaited recovery in the 3rd quarter, with a slight decline in the vacancy rate reported following seven consecutive quarters of decline.  According to statistics provided by CB Richard Ellis, the vacancy rate fell to 17 percent from 17.3 percent across all property types.  Class A space has the lowest direct vacancy rate at 14.2 percent, and totals 6,900,000 SF.  Class B vacancies total 15.9 percent, or 8,900,000 SF.  Class C space reports a 15.3 percent vacancy rate, or 3,500,000 SF.

This is cautious but good news for building owners.  “Armageddon has passed us,” said John Dempsey, a senior vice president with CB Richard Ellis.  “We’re not happy about how things are today, but we’re looking down the road and seeing things are getting better.”  He noted that electronic trading firms are currently dominating the market, with companies looking at upper tier Class A office buildings.  During the 3rd quarter, demand – measured by net absorption – was positive for the first time since the end of 2009.  A couple of significant deals completed during the 3rd quarter helped the market, such as the Getco LLC lease to double its space in the former Apparel Center at 350 North Orleans Street.

Federal Presence Strengthens Washington, D.C.’s Office Market

Tuesday, September 7th, 2010

Washington, D.C.’s 10.4 percent office vacancy rate is far below the 17.3 percent national average.  Washington, D.C.’s commercial real estate market – including its Virginia and Maryland suburbs – continues to be the nation’s most stable with vacancy rates far below the national average.  The area’s vacancy rate stood at 10.4 percent at the end of the first quarter, far below the 17.3 percent national average, according to Reis, a New York-based real estate research firm.  Effective rents have fared well through the Great Recession, sliding just five percent from their 2009 peak high of $41.43 PSF.

“There is a tremendous amount of domestic capital looking to invest in D.C. for obvious reasons,” said John Kevill, managing director in Jones Lang LaSalle’s Washington, D.C. office.  “Aside from its solid fundamentals, investor demand is being stoked by the area’s dominant industry, the federal government.  The office market is benefitting from continued government spending in areas such as healthcare, the war on terror and the economic stimulus package.  That activity is really differentiating our economy from virtually every other economy in the country, which is why we are seeing an increase in transactional velocity”

As an example, Jones Lang LaSalle at present is listing twice the number of for-sale properties than just one year ago.  A key selling point for an office building in Landover, MD, is a 10-year lease just signed with the General Services Administration (GSA) on behalf of the Department of Defense.  The two-story Class B office building recently sold for a cap rate of 8.4 percent; the purchaser was the Government Properties Income Trust.  Real Capital Analytics reports that cap rates for Maryland office properties averaged 9.4 percent over the past year.

Westin River North Hotel Sale Proves Neighborhood’s Viability

Tuesday, August 24th, 2010

No recession in River North: the 424-room Westin Hotel sells for $165 million.  A sign of Chicago’s River North neighborhood’s inherent commercial strength is the recent $165 million sale of the 424-room Westin River North Hotel at 320 North Dearborn Street.  The purchase price was approximately $389,000 per room, an excellent price considering that the hotel market nationally has struggled.  The price was 37 percent higher than Tishman Realty & Construction paid for the riverfront property 10 years ago.

According to Tishman, they “decided to take advantage of the pent-up (investor) demand for high-quality, performing hotel assets.”  Since Tishman purchased the hotel, it has “posted strong returns and consistently outperformed its competitors.”

The purchaser is Host Hotels & Resorts, Inc., an East Coast-based real estate investment trust, which owns a six-property Chicago-area portfolio.  Their Chicago hotel portfolio includes the Embassy Suites Hotel at 511 North Columbus Drive; the Swisshốtel at 323 East Wacker Drive; and the Courtyard at 30 East Hubbard Street.

Chicago Boasts 2010’s Biggest Commercial Transaction

Tuesday, August 17th, 2010

In Chicago’s – and one of the nation’s — largest commercial transactions of 2010, the 60-story, 1.3 million SF 300 North LaSalle Street skyscraper was sold for a whopping $655 million.  That adds up to $500 PSF. The buyer was KBS Real Estate Investment Trust II (KBS REIT II). The LEED Gold certified building, which is 93 percent occupied by such tenants as Kirkland & Ellis, LLP; Boston Consulting Group; GTCR Golder Rauner, LLC; and Quarles & Brady, LLP, is a Class AAA tower completed in the spring of 2009 by Hines Interests.300 North LaSalle Street sells for $655 million – that’s $500 PSF.

“This high-quality property, with its strong tenant credit and long-term leases, fits perfectly within our investment parameters to provide long-term cash-flow stability,” said Bill Rogalla, KBS Realty Advisors senior vice president.  “It qualifies as one of the newest and highest-quality properties built in the U.S. in Recent years.  The building’s features, unmatched view corridors and LaSalle Street address resulted in a rapid lease-up even during the economic turndown.  We expect the building’s Class AAA-quality and environmental attributes to contribute to significant tenant retention over the long term.”

The interesting thing about the deal is it’s an indication of the large capital pipeline the REITs have amassed.  Also, it proves that assets with long-term leases and high-credit tenants are still trading at historically low cap rates.