Industrial N Illinois

Where Chicago is headed: A Q&A with Colliers’ Jim Carris

Where Chicago is headed: A Q&A with Colliers’ Jim Carris,ph1

Industry veteran Jim Carris recently joined Colliers International as executive managing director and market leader for the firm’s operations in Chicago. Carris brings to his new role over 25 years of experience in all sectors of commercial real estate, making him a prime candidate to probe for answers about the state of the Chicago economy, and where he sees the variety of real estate opportunities headed.

Chicago continues to steal corporate headquarters from the suburbs, such as the recent move by Peapod, which Colliers facilitated. What makes the Chicago CBD so attractive to these companies, especially when they already had access to the market with a suburban location?

I think the key is transformational change and access to a certain segment of employees. It’s about labor, and how you might change certain aspects of your company. For example, McDonald’s clearly wanted to make transformational change, so they moved to the Fulton Market District. At the end of the day, it’s about labor and it’s about the millennial workforce. Millennials are here because of the shorter commutes, the greener lifestyle, mass transportation and living the live-work life that Chicago has created.

That’s not to say that the suburbs are dying by any means. As evidenced by some of the high-profile leases that have been signed and expansions of companies like Paylocity, for example, out in Schaumburg. But nevertheless, there’s quite a bit of activity. A number of companies are moving downtown and expanding in this vibrant community that is Chicago.

So as you point out, even with the high-profile corporate relocations, Class A office space in the outer submarkets remains active, such as the recent transaction for Schaumburg Towers. Is this sustainable, do you think, or will demand for suburban offices dry up?

No, the demand for offices will not dry up. Specifically, I think that there’s a flight to quality, as there often is when you’re seeing some level of vacancy. For example, in the fourth quarter of ‘17, the net absorption in the suburbs was 790,000 square feet year over year. That’s pretty substantial for the suburban market. Rosemont, for example, which is an inner circle market, is down to about a 12.8 percent vacancy rate, which is down from the last three years of about 16.7 percent. Not to mention that rents are increasing. So you still see a flight to quality, you see Class A buildings that are vibrant and also the repurposing of certain properties as well.

How are you advising investors looking to enter the Chicago market? Is there a particular asset class or submarket that will offer the best short- or long-term gains?

The industrial assets are still the darlings of the investment market. Proliferation of e-commerce continues and there’s a demand for well-located industrial sites. There aren’t very many industrial development sites available and there has been quite a bit of repurposing of locations in key industrial areas.

So we’re advising on the industrial market, particularly around e-commerce. There’s still quite a bit of activity in multifamily as well, in the form of deconversions from condos to rental properties. In Class A office, selectively in the suburbs and obviously with the right cap rates in the CBD, those are really good purchases right now.

As hot as the industrial sector is, there had been some hand-wringing about the amount of new, speculative product coming online that was going unleased. Was this worry unwarranted? Chicago’s big box vacancy decreased for the first time in two years last quarter, so it would appear that the demand is still there.

I think the demand has always been there, but we saw quite a bit of speculative development. In the first quarter of ‘18, there was only 7.2 million square feet under construction, which is a stark contrast to the 22 million square feet that was under construction by the end of 2016. That’s a dramatic difference in the amount of development. We also saw a bump in the absorption rate in the last quarter as well. It’s natural in a marketplace where developers have a sense of where demand is going to be and they move in the speculative development. Now there’s a slowdown of the new development partly because of the vacancy rate, but also because of the fact that there are fewer fantastic sites to develop. And so you’re seeing the absorption rate increase and the vacancy rates go down.

We’ve talked about the disruption that e-commerce and deconversions have had on the industrial, retail and multifamily sectors. Do you see any trends right now for disruption in the office sector?

In the office sector—at least in the CBD, we’ve yet to see it expand dramatically in the suburbs—the biggest disruptors are coworking spaces like WeWork and Regus. That is having a disruptive effect. It’s still in its early stages, but we’ll see how that has an effect on business growth and then the absorption of office space. By the same token, you’re seeing corporations drive towards workplace strategies to create more of a cultural workplace experience for their employees, oftentimes resulting in taking smaller spaces. That is also a disruptive effect. And there are technologies that are that are driving more efficient use of space on behalf of occupiers. We’re also starting to see a trend where those millennials that corporations are moving downtown to attract are starting to form families and migrate to suburban locations to buy a home. That trend is occurring on a national basis, and we’re watching it closely for how it’s affecting the Chicago market as well.

What’s your take on the health of the Chicago economy and how does Collier’s foresee the business climate going forward?

It probably won’t surprise you that we’re bullish on the overall Chicago metro economy. I led, on behalf of CBRE, JLL and Cushman Wakefield, a multi-organizational task force consulting with the city on the Amazon HQ2 pursuit. We provided site selection information, labor information and incentives information. One of the things we found is that the city of Chicago specifically is gaining college-educated residents at an unprecedented rate. That increase was in the area of 300,000 college-educated residents over the last several years. That bodes well for the future of the Chicago economy, and thus has as effect on the suburbs as well. We draw from the Big 10 university as well as the City Colleges of Chicago. So we’ve got labor, we’re affordable compared to the coasts and overall we think the Chicago metro area is going to be attractive to both small and large businesses for many years to come.

Do you care to put your nickel down on HQ2? What are Chicago’s odds?

I think Chicago has a really good chance. We showed really well. I’m a Chicagoan—I was born and raised here, I went to school down at Illinois, Loyola Law School and Notre Dame for my MBA. So I sound like a bit of a homer. But what I learned from that process made me even more proud of Chicago and encouraged about the future of Chicago and the whole region and how well the city and the state worked together.

We put together 10 sites and two of them were suburban sites. I don’t know of any of the other competitors that had done that, not only as far as a broad range of alternatives, but also put city and suburban sites together. Chicago shows as one of the greenest cities not only in North America, but in the world and has put some great efforts into that. So I think Chicago’s got a good shot. We put together, with the city’s lead, a really compelling analysis of Chicago and how it fares against other cities both in the U.S., in North America and the world, and that’s something that could be used for attraction of other employers as well.

It’s interesting to hear you say that. Amazon has been getting some heat for this selection process, in part because they can catalogue the various pitches and know what tax breaks they can squeeze out of a market in the future. But it sounds like you’re saying the cities themselves can get some benefit as well.

Absolutely. And I give the mayor and the governor a lot of credit. Regardless of what you see in the papers, they joined forces and put together such a compelling analysis of the Chicago metro area, both strengths and weaknesses. What does labor cost in Chicago? What do we draw from? Getting a consensus of university presidents from the area and getting an agreement on programs—degrees in Amazonian studies, if you will—to create a pipeline for employees to these high tech companies. It was unprecedented. I don’t think another community had done that. But also, the city honed its skills and is now prepared around labor costs, around housing costs, around housing pipeline and around the draw for future labor. All of those factors come into play when deciding to relocate a business or create a business in a certain market and all of those are applicable to other employers as well. It was a great exercise and I was really proud to be a part of it. If it’s not HQ2, it’s going to be many other high quality employers that are going to be interested and eventually move to Chicago or create or expand operations.