When CBRE recently hired Paul Lundstedt to be its executive vice president, capital markets, it was a coup for the firm, according to Chris Connelly, CBRE’s executive managing director, particularly because there is a dearth of talent in the suburban office market.

Connelly recently spoke with IREJ about the impact Lundstedt’s hiring will have on the firm and how the company plans to approach a challenging office investment environment in 2012.

Q. What is CBRE doing to improve its office investment business?

The first thing we’re doing is recruiting and obviously Paul is representative of that. We’ve fallen off for a number of reasons over the last few years in the office business, particularly in the suburbs. It’s something we’ve been very focused on. The talent is not super deep, so it’s hard to find a lot of quality folks. It’s kind of a different business. You’ve got a few top-tier people. It’s not that there are bad people, there just aren’t many people in that business. We were chasing Paul for quite some time, and he’s going to fill a huge void for us out in the suburbs, and ultimately he’ll work on downtown as well and we’ll grow both of those businesses going forward under his leadership.

Q. Why is the office investment business so challenging right now?

Over the last three years, we’ve had some personnel changes here and we haven’t been able to find the exact right fit. Paul obviously solved that immediately. We just haven’t had the right folks in the space, particularly out in the suburbs. In terms of the market, if you’ve got really good core product, it can trade, but if there are any issues with the asset in terms of vacancy, etc., it’s difficult. It’s such a challenging environment particularly in suburban Chicago. This a completely different buyer mix that’s starting to emerge in the suburbs, and Paul is way out in front of that trend, which is great. He’s got great relationships with all of these new players. Making an investor comfortable with the story in Chicago is challenging, but if you understand the story, there is one to be had, and Paul is just great at telling it.

Q. What other markets or submarkets does the firm plan on focusing?

In Chicago, it’s suburban and downtown, and Paul is going to be spanning both of those markets. He also had the practice that extends outside of Chicago into some of the other Midwest markets, so we’ll be doing business in places like St. Louis, Detroit, Kansas City, etc. Paul had developed more of a regional practice in the last few years, so he’s going to focus on that as well.

Q. What have been some of CBRE’s most recent successes?

The most recent success we had actually is downtown. We had sold 250 S. Wacker, which was a great story, and that just closed before the end of the year. And in the first quarter, Paul is going to be coming out with a few packages out in the suburbs. So we’re looking forward to transacting those assets as well.

Q. What do you foresee for the Chicago market in 2012?

I think you’ll see that core product that comes to the marketplace will trade. There are a few buildings that have come out in the suburbs here in the first quarter, and there are a few more coming out. I think the investment community will watch what happens with those trades and what kind of appetite they garner, and then I think you’ll see a reaction accordingly. We’re going to watch that pretty closely. In downtown, I think there is a really good story developing in terms of low vacancies in that class A market and I think that will attract some attention from institutional investors downtown in 2012. I think it’s a pretty positive story that’s shaping. There’s still some uncertainty, but if you’ve got a good core of assets, there’s a good story to tell.

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Two years ago, as the economy was still on its downward spiral, River North-based Urban Innovations was at a crossroads.

Aaron Zaretsky, leasing director at UI, watched the firm’s inventory creep up to its highest vacancy in years. He came to the conclusion that the firm would have to take one of two drastic steps: cut prices significantly or double down by injecting more capital into its older product.

He decided to do both.

Aaron Zaretsky, leasing director at Chicago-based Urban Innovations

“If the product is stale, it is either priced too high or the layout is compromised,” says Zaretsky.  “It’s always one of the two. The market doesn’t lie.”

With that, the firm set off on an ambitious remodeling effort, investing new capital  into certain properties in a multi-phased process. Likewise, UI was willing to do shorter deals with startup firms seeking very competitive rates.

“To be honest, if I was starting my own business, I wouldn’t be paying a lot in rent right now,” he says.

The strategy has paid off. The firm is now 97 percent leased throughout its 650,000 square feet of urban loft space in the River North neighborhood. It has leased a total of 115,000 square feet so far this year in 37 deals.

“We had a tough 2009, but as soon as we hit 2010, the phones started ringing,” says Zaretsky.

Revitalization

While the firm itself has been revitalized, the neighborhood that it has called home since 1983 is no stranger to the process either. Walk down any street in River North and you will see a mix of old and new. The area just north of the Chicago River is home to several glass skyscrapers, new high-rise apartment and condo buildings, and several trendy restaurants run by some of the country’s most recognizable chefs. Interspersed throughout all of this are constant reminders of the area’s past. Mid-rise red brick buildings, old warehouses and a few stately civic buildings give a sense of what the neighborhood once was: an industrial district that served the Port of Chicago.

From the 1920s to the 1960s, the area served as the main warehousing district for nearby Navy Pier. When the fabled pier shut down commercial activity in 1972, moving the majority of shipping further south to the Calumet River, the area now known as River North fell into disrepair. A short walk from the central Loop, it became the city’s unofficial red-light district.

Developer Albert Friedman is credited with first investing in the area 35 years ago. He coined the term River North for marketing purposes. The area is loosely defined as north of the Chicago River, west of Michigan Ave., south of Chicago Ave. and east of the west branch of the Chicago River.

Not long after Friedman began redeveloping warehouse space, Howard Conant Jr. founded Urban Innovations in 1983. The firm began to retrofit older properties as urban loft space for office users. At one point, it owned 1 million square feet and 11 properties. It sold several properties at the height of the commercial market a few years ago.

The recent recovery may be slow, but it has been enough to trigger a wave of leasing for UI. Many displaced workers have given up trying to find jobs with established firms, and have subsequently banded together with other like individuals to form small, start-up companies.

This has been the target market for UI, says Zaretsky.

The firm knows its client base and has modified its leases and space to accommodate this rush. Zaretsky says that the firm’s typical lease is now for space between 2,000-4,000 square feet and at terms of two years or less.

Short-term leases may not seem like the dream scenario for a commercial real estate firm, but it has kept Zaretsky incredibly busy and, most importantly, the firm’s inventory is almost fully occupied.

The shift seems to fit with an overall UI philosophy: Gain the trust of clients by doing what is right for their business.

It comes across in the firm’s willingness to do short-term deals with office users. New firms don’t want to think too far ahead when it comes to commercial space. With so many unknowns to address in the first year of business, expansion and lease terms are hardly the most pressing issues for entrepreneurs. By allowing firms the ability to test the waters without any long-term commitments, Zaretsky finds that he is often rewarded when the firm gains its footing and is looking to expand.

Many of the deals that the firm completed in 2009 and 2010 will come up for renewal later this year. Zaretsky says that multiple tenants have already resigned, with many of them choosing to expand. He expects UI to double the amount of deals that it has already completed this year, with more firms set to renew.

The firm’s philosophy is also is evident in how it deals with its 90,000 square feet of retail space.

The firm has turned away lucrative deals in favor of what Zaretsky calls “right” deals. He is very cognizant of what deals would benefit or hurt current tenants. The majority of space is street-level retail that houses the art galleries and high-end furniture makers that the neighborhood is now known for. Zaretsky says that he has turned away businesses that would not fit the same balance of his current clientele, namely stores that offer discount product.

He has also turned away concepts such as health clubs, spas and fast food chains, because they do not fit the same aesthetic that the facilities now house.

“Our philosophy regarding retail leasing is to create and maintain a well-integrated assemblage of showrooms and art galleries,” he says. “Retail tenants benefit by the establishment of a cohesive community and we create a better opportunity for retail demand.”

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Adam Roth has worked in the distribution and logistics industry from almost every angle imaginary. From working as a third-shift dock supervisor in a small Midwestern market while employed by a logistics company, to dealing with C-suite executives as a member of NAI Hiffman’s Industrial Services Group, he can honestly say that he has worked on both sides of the equation.

As the cost of fuel prices go, so does the industry. Roth works extensively at the CenterPoint Intermodal Center in Joliet and Elwood and he recently explained to Mark Thomton, editor of the Illinois Real Estate Journal, why rail is going to play an increasing role in distribution operations and why Chicago is perfectly situated to capitalize on it for the foreseeable future.

How did you get started in commercial real estate?

Before getting into commercial real estate I was in the logistics industry for just over 10 years. I was transferred to Chicago while I was working at a 3PL. Two close friends of mine, unsolicited, mentioned that I would be good at real estate.

Did they give you a reason?

I asked them why and they just said that it would be a good fit for me. It was unusual because in a three week span, two different people mentioned it to me. A couple months later I was looking at my career path and I thought that it might be the opportunity to make a change. Worst case scenario, if I failed miserably, I could go back to what I was doing before. One of the people I reached out to was Dan Leahy (of NAI Hiffman). We met and I realized in meeting with Dan that my learning curve would be faster based on my logistical background if I focused on industrial. Dan thought there was an opportunity for us to work together.

Was the learning curve for Real Estate steep?

A saying that I have heard and that was true for me is “the first year in commercial real estate takes two years.” That’s pretty accurate. Once I established relationships in real estate and entered into strategic conversations with companies, I realized that my background in logistics was much more beneficial than I anticipated.

How often do you work with the transportation providers directly?

I talk to the railroads almost every day. I talk to several trucking companies that work out of the CenterPoint Intermodal Center in Joliet as well. What I have found is that if we engage with a tenant that is strategic in nature, real estate is such a small part of the calculation. Transportation tends to be 8-10 times the cost of real estate. If we are engaged at a strategic level, our time is spent helping them solve their transportation problems and then real estate is eventually part of the conversation. Solving a client’s transportation issues far outweighs any discount we can find on the real estate side.

What are some of the transportation solutions that you talk to your clients about?

Clients want to know about conversion to intermodal. Historically, a lot of companies would bring their freight into the West coast, dray it, truck it to the Inland Empire, transload it in a facility, put it on 53-foot boxes and either truck it or intermodal it across the country. Now, we are having conversations with companies about taking their containers all the way inland if they have the density and the volume that can justify doing it. Conversations are not only about inbound freight, but how we can utilize that equipment and get it back out to the coast and back over to Asia. I also have conversations in regard to permit fees that reduce fees for heavyweight shipments. California has an 80,000 pound restriction on heavyweight loads for the roads, so now we are working with clients to get their freight all the way to the dock via rail. We can load heavyweight containers in Joliet/Elwood, put it on the rail, ship it across the country and the train goes right on the dock in California. It avoids the 80,000 pound restriction. If you can accomplish that as a heavyweight shipper, it is extremely efficient. These are just examples of conversations we typically have, but it is very different than just talking about what rates are for a 3-5 year lease.

How is activity at the intermodal center?

Activity has been good. The BNSF operation opened at the end of 2002 and the Union Pacific operation opened in August of last year. It is the largest inland port in North America. Within another year, the BNSF operation will become the largest in its network. It is absolutely the future of distribution and the supply chain in our country. It is extremely efficient and it is more energy efficient, which will become a larger issue in the coming years. It gets trucks of the road and freight off the highway, which is an issue with our infrastructure. Even in the downturn, the railroads have been spending a tremendous amount of capital on infrastructure improvements to prepare for this future capacity.

What will happen to distribution hubs that are not located near an intermodal center? If fuel costs become an issue, what will happen to the O’Hare market that relies on air freight?

I get asked that question on occasion. Rail will become a more integral part of pretty much everyone’s operations, as long as they have a large enough quantity to ship. Frequently, people will make broad statements about how distribution models will look in the future. I see statements about how everyone will be doing specific things with distribution, but the truth is it is very case specific. It depends on the specific company’s needs. One blanket statement I will make is that there will be a transition away from smaller parcel. When you think about distribution in general, the most efficient method is to ship in as big of bulk as you can. It is economies-of-scale 101. If you can ship by barge, it is very efficient. But not a lot of commodities can do that. If you can ship by box car, 3-5 truckloads make up one box car, then that is a very efficient cost per ton. Then you go to intermodal, then you go to truck driving, and as you get down in bulk weight, your cost goes up. It’s an inverse relationship. Air freight parcel is the highest cost. No matter what, there are going to be products that require that, but if you have the option, companies will train their clients and their customer base to deal with slower transit and a more cost effective mode of transportation. There is a tipping point for everything and fuel is the common denominator.  I think we will see $300 a barrel by 2020. Once you get to a certain point on fuel, some of that manufacturing will come back to the states. 3PLs will continue to gain market share and there will continue to be a migration to rail and consolidation.

How is the current rail system in Chicago?

There are issues with the rail network and its age in Chicago, but it is improving. The intermodal center has been a huge success. It has greatly aided in the infrastructure of our rail system. People often state concerns about the competitive level of Illinois—and some of it is justifiable– when compared to other states, but there is no intermodal system like this anywhere else. One thing we have going for us that other states would love is our transportation network and our access to population. Even with all of our faults, that is why so many people still locate to Chicago in my opinion.

Will the widening of the Panama Canal have any effect on the Chicago market?

The expansion will be complete in 2014 and they are on schedule. Even Panama Canal officials don’t see this as a light switch where 25 percent of the freight will migrate from West Coast to East Coast. It will be a gradual migration. When you think about transportation, the most efficient thing is to keep it on the water in bulk size. When people can, they will ship it all the way to the East Coast on the container vessel. There is still a large population base in the West Coast. People have been shipping to the East Coast from the Suez Canal for years, but the general opinion that I have seen is that it won’t be a big influx. People will migrate where they can and when it is cost effective.

Will other Midwestern cities attempt to establish intermodal centers to compete with Chicago?

The key with intermodals is that you have to have critical mass and density. There is enough freight volume on the west coast to create full train loads to travel intact all the way to Chicago. Now, with grain and other exports going out of Chicago, we are starting to get great volume heading back out west. Does a secondary or tertiary market have the density to do this? In my experience, most of the time, they do not. You have to have critical mass and density to make it work. Very few communities have it. Chicago does.

What have you seen in the industrial market in the last 12 months?

The industrial market has really picked up since November of 2010. Activity is much more real and transactions are getting done. There seems to be an underlying theme: tenants that have the opportunity to reassess their current lease situation are taking advantage of the market place. If they can, now is the time to take advantage of aggressive lease rates. I see that window in some corridors starting to close. I think we will see some speculative construction in 2012. I would not have thought that in the 3^rd quarter of 2010.

What do you love about this business?

Strategizing with companies and making an impact beyond the lease rate.

What is something that people in your industry might not know about you?

For about four years I was in the operations portion of the logistics industry. I was working third shift as a front line supervisor on a dock. I had 15 union guys reporting to me. It was a wild experience. There were people working on the dock for longer than I had been alive. Working with them and seeing how different freights are handled was invaluable.

If you had to give a piece of advice to someone looking to get into logistical real estate, what would you say?

Learn the rail. The opportunities there will continue to grow. Also, learn your client’s business as much as you can. We like to think that we are the center of the world, but in the logistics industry, we are a very small part of the overall calculation.

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A long court battle may come to an end soon as a Cook County circuit court judge ruled that the Village of Lincolnwood may demolish the Purple Hotel building at 4500 W Touhy Avenue if the property owner, Village Resorts Inc., does not bring the building up to code by August 1, 2011. The demolition of the well-known property, due to its distinct purple façade, would be paid for at the owner’s expense.

The village was represented by Steven M. Elrod, a partner with Holland & Knight, in a case that dates back to March of 2010, when the village filed a complaint against the property owner, alleging that the property was in violation of 31 building and property maintenance code provisions.

The complaint asked for the building to either be brought into code compliance or to be demolished in accordance with the Illinois Demolition Act.

The court ruled in favor of the village, citing the property as “dangerous and unsafe.”

Elrod says that it is very rare for this ruling to be declared on a property of this size. It is usually used in rulings on “abandoned one-flat or two-flat properties in the City of Chicago.”

At this point, Elrod says that it would be more expensive to bring the property up to code than to demolish it.

The property has been on the market for years, after it was officially closed in 2007 because of health and building violations. Inland Real Estate Acquisitions and TMK Development agreed to purchase the property in 2008 for $27 million, but then backed out of the deal in early 2009.

Now, unless a new buyer steps forward, or, the current owner complies with court orders, the building will likely face demolition as soon as August 2. If it does come to this process, the city will bill Village Resorts Inc. for the cost of demolition. If the company does not pay, the village has the right to put a lean on the property that will supersede all other leans. The village may then decide to foreclose on the property and take control of the land.

“The ultimate goal is to have property redeveloped,” says Timothy Wiberg, village administrator for Lincolnwood. “It is a blighted property on a very prominent corner.”

Wiberg says that they village often receives complaints from residents, especially those who live in condominiums directly across the street from the Purple Hotel.

Village Resorts Inc. may receive a boost in the coming weeks as the Village of Lincolnwood is in the final stages of establishing a TIF district in the defunct hotel’s location. This could be a welcome tool to entice more potential buyers to the property.

Wiberg says that the TIF could be approved as early as February 17 and that no residents spoke against it at the village’s last public meeting.

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