Illinois Real Estate Journal February 2011 : Page 1

VOLUME 14, NUMBER 1 ©2011 Law Bulletin Publishing Co. February 2011 Bucking the trend **Directories Inside Real Estate Investment • Advanced Degrees/Real Estate Schools*Page 22 he city of Chicago may be littered with failed condo developments, but the rocky market was not enough to deter investors from floating a $170 million construction loan to local developers last year for the Lincoln Park 2520 condo development in the upscale north side neighborhood. It was a move that raised a lot of eyebrows, and perhaps sparked some jealousy, as a consortium of lenders led by the Americas Division of Sumitomo Mitsui Banking Corporation did what no other lend-ing group had done for nearly two years: fund a major condo project in the City of Chicago. The beneficiary of the loan, Ricker-Murphy De-velopment LLC and Lake Tower Development, LLC, an affiliate of the GE Pension Trust, advised by GE Asset Management, was in a stalled state since it had finished demolition work on the site in 2007. The city has experienced numerous high profile condo plans drift by the wayside, or, become mired in legal troubles in recent years. According to Appraisal Re-search Counselors, 20 projects that were engaged in marketing campaigns were halted by developers in 2008. Those projects constituted 3,800 units. John Murphy, co-principal of Ricker-Murphy De-velopment LLC and president Chicago-based MB Real Estate, says that the deep recession undoubt-edly prolonged the project, but that he never wa-T DEVELOPMENT continued on Page 18 Investment market builds on momentum from 2010 I nvestment sales activity in 2010 did not have to register much to outpace 2009 numbers, but nev-ertheless, investors made a big splash, purchasing multiple trophy assets and increasing activity in the second half of the year, setting the stage for what could be a more active 2011. According Real Capital Analytics the Chicago mar-ket recorded a sales volume of $2.7 billion, a 397 per-cent increase from 2009 sales activity. This was due in large part to major trophy sales, with 300 N. LaSalle fetching $655 million from KBS Realty Advisors and the Hyatt center selling for $625 million to Irvine Co. Like the trophy assets, the majority of sales were in the CDB, which recoded $2.149 billion of the stated activity, for a 782 percent increase from 2009, demon-strating that investors were more keyed into the downtown market than the suburban market. Overall sales activity at the national level was at $41.6 billion for office sales, up from $17.3 billion the year prior. While it still lags behind the $56.9 billion in 2008 and pales in comparison to the $213 billion experienced in 2007, relatively speaking, it seems that some demand has returned and investor confidence is increasing. “I think that the financing markets have started to open up in a clear way and there is a lot of pent up demand,” says Bruce Miller, managing director of Jones Lang LaSalle. The demand has come from two separate spec-trums, says Miller. On the higher end, the money that INVESTMENT continued on Page 16 PRSRT STD U.S. Postage PAID MINNEAPOLIS, MN PERMIT NO. 31515

Feature | Multifamily

Bucking the trend

The city of Chicago may be littered with failed condo developments, but the rocky market was not enough to deter investors from floating a $170 million construction loan to local developers last year for the Lincoln Park 2520 condo development in the upscale north side neighborhood.

It was a move that raised a lot of eyebrows, and perhaps sparked some jealousy, as a consortium of lenders led by the Americas Division of Sumitomo Mitsui Banking Corporation did what no other lending group had done for nearly two years: fund a major condo project in the City of Chicago.

The beneficiary of the loan, Ricker-Murphy Development LLC and Lake Tower Development, LLC, an affiliate of the GE Pension Trust, advised by GE Asset Management, was in a stalled state since it had finished demolition work on the site in 2007. The city has experienced numerous high profile condo plans drift by the wayside, or, become mired in legal troubles in recent years. According to Appraisal Research Counselors, 20 projects that were engaged in marketing campaigns were halted by developers in 2008. Those projects constituted 3,800 units.

John Murphy, co-principal of Ricker-Murphy Development LLC and president Chicago-based MB Real Estate, says that the deep recession undoubtedly prolonged the project, but that he never wavered in his belief that it would be completed. When the financial markets came to a screeching halt in late 2008, the developers approached their buyers and extended an offer.

“We knew that this process might take some time,” says Murphy. “We went to our buyers and told them that they could back out of any agreements without any penalties. About one-third of our buyers at that time did decide to leave. But I think the fact that so many decided to stay speaks to how unique this project is.”

The project’s location and design give it a marquee spot in the upscale Lincoln Park neighborhood. Located at 2520 N. Lakeview Ave., the development will have unobstructed views of Lake Michigan and overlook the North Pond in Lincoln Park. It will also be the only luxury condo high rise development coming on line in the area in 2012 and possibly for years to come. It presents a unique opportunity that is currently not matched in the market.

Gail Lissner, vice president condominium development for Appraisal Research Counselors, says luxury high rise condo development is not common in the Lincoln Park market.

“If you think about high rise development in Lincoln Park, the market delivers one about every 10 years,” says Lissner. “The reason for this is that there are so few sites. Ten years ago it was 2120 Lincoln Park West.”
With so little coming on line, the developers may benefit from little competition in the market place. The Trump Tower still has condos available and the Ritz Carlton Chicago will be delivering 89 units this year, but in 2012 Lincoln Park 2520 will be the lone delivery.

“Everything has been delivered except for the Ritz Carlton,” says Lissner.
“Nothing else is in any kind of pipeline. Lincoln Park 2520 could have timed the market right.”

Project developer Murphy believes that the building will benefit from the lack of product in the market. “We like our place in the market cycle. We will be one of the only new buildings on the market.”

Recent sales have buoyed Murphy’s confidence as the building is “approaching” 50 percent of units presold. Many of the buyers have been local Lincoln Park residents looking to downsize their homes, or, suburban empty nesters who want to sell the house and move downtown.

“It was slow for the first seven-toeight months, but once construction began and a building slowly emerged from the ground, sales activity picked up,” says Murphy. “We just poured concrete on the 17th floor.”

Murphy believes that once the building is complete, sales will increase even more, saying that the last four-to-six months of the selling cycle are typically the strongest. Many prospective buyers like to see a completed building.

Appraisal Research Counselors’ Lissner says that there is no real evidence showing that the luxury market is selling at a faster rate than the entry level market, but there is evidence that pricing has not been as affected by the downturn.

“One thing we have noticed in the market is that the best properties have been affected least by the downturn,” says Lissner. “We haven’t seen the downturn in pricing in luxury property when compared to entry or market level developments.”

The number of units for Lincoln Park 2520 has changed throughout the project. Officially, the building will be 39 stories with 228 residential units. However, that number has fluctuated as many buyers have decided to purchase multiple units and combine them. The end result could see a total of 175 units.

Prices range from $667,440 for a twobedroom, two-and-a-half-bath condo, to more than $11 million for a five bedroom, five and-a-half-bath penthouse.

The project will also offer 19 townhomes that will border a 1.25 acre private park on the development site. Marketing for the townhomes has not yet begun, but there is already a waiting list of potential buyers.

Residents of Lincoln Park 2520 can expect high-end luxury touches and appliances at the standard entry-level inclusions. Buyers will meet with design teams twice before they enter their finished unit to decide wood flooring options, tile finishing for bathrooms, and kitchen cabinetry. All selections will be from designer providers. Kitchens will come equipped with appliances from Sub-Zero, Wolf, and Miele.

The project is pending LEED certification. The building will also utilize a closed-loop water source heat pump system for heating and cooling. It is a very efficient and environmentally friendly HVAC system. Monthly assessments range from $220.50 on a onebedroom unit to $4,407 for a five bedroom penthouse.

Residents will begin moving into the building in 2012. It will be a staged move-in as floors 1-16 will be occupied in the first quarter as interior finishes are completed on floors 17-39. The remaining floors will be occupied in the second quarter of 2012.

Lincoln Park 2520 was designed by award-winning Chicago-based Lucien Lagrange Architects. The development team also includes: Walsh Construction Company, construction manager; Cosentini Associates, Inc., MEP engineer; CS Associates, Inc., structural engineer; Darcy Bonner and Associates, interior architect; Thomas Balsley, landscape architect; Charles Reiss, project planning; Rubloff, exclusive sales agent; and Market Hooks, Inc., project marketing.

Read the full article at http://www.irejofficecentre.com/article/Feature+%7C+Multifamily/638073/60970/article.html.

Feature | Investment

Investment market builds on momentum from 2010

Investment sales activity in 2010 did not have to register much to outpace 2009 numbers, but nevertheless, investors made a big splash, purchasing multiple trophy assets and increasing activity in the second half of the year, setting the stage for what could be a more active 2011.

According Real Capital Analytics the Chicago market recorded a sales volume of $2.7 billion, a 397 percent increase from 2009 sales activity. This was due in large part to major trophy sales, with 300 N. LaSalle fetching $655 million from KBS Realty Advisors and the Hyatt center selling for $625 million to Irvine Co. Like the trophy assets, the majority of sales were in the CDB, which recoded $2.149 billion of the stated activity, for a 782 percent increase from 2009, demonstrating that investors were more keyed into the downtown market than the suburban market.

Overall sales activity at the national level was at $41.6 billion for office sales, up from $17.3 billion the year prior. While it still lags behind the $56.9 billion in 2008 and pales in comparison to the $213 billion experienced in 2007, relatively speaking, it seems that some demand has returned and investor confidence is increasing.

“I think that the financing markets have started to open up in a clear way and there is a lot of pent up demand,” says Bruce Miller, managing director of Jones Lang LaSalle.

The demand has come from two separate spectrums, says Miller. On the higher end, the money that chased trophy assets was generally from large, institutional pension or life insurance funds. These firms were active because of continued low interest rates and commitments to shareholders to allot a certain amount of investment dollars to commercial real estate. This activity helped spur some of the record prices achieved for trophy assets.

“Institutional investors wanted stability,” says Miller. “They wanted highquality stable assets. Because there is only a finite number of those assets, prices went up.”

On the other end of the spectrum, a significant amount of money has been assembled to purchase distressed debt. When the market initially turned in 2008, many thought that distressed purchases would become quite common. That has not been the case. However, Real Capital Analytics reports that Q4 2010 saw more distressed sales than the rest of the year combined and accounted for 17 percent of all office volume, the highest percentage of the year. The research firm reports that this “spike in lender dispositions could be a bellwether for the coming year as lenders still have a considerable quantity of distress to work out.”

Miller says that while distressed sales have picked up across the country, Chicago has not followed suit.

“Chicago is still a little different from other areas of the country,” he says. “It didn’t see as many distressed sales as the rest of the country. The reason for this is that the majority of maturities in Chicago come due in 2011, 2012, and 2013. We have seen so little distressed so far, but I think that we will see more.”

Investors are also likely to increase their appetite for risk in this market as many of the core assets are unattainable now and the efforts required for turning around certain distressed assets may strike some as too daunting. This will lead some investors to start kicking the tires on non-core assets.

John Murphy, president of MB Real Estate, believes that this scenario will begin to play out in the downtown market this year.

As more capital begins to flow, investors may not shy away from valueadded opportunities. For the past few years, with such uncertainty in the market, it seemed that no one wanted to take a chance on properties that required any leasing element. While the unemployment rate still lingers at a historically high level, consistent growth in the economy may give investors the confidence to take on a certain level of leasing risk.

“I don’t see institutional capital going into facilities that are 70 percent vacant,” says Murphy. “I think ‘higher risk’ would qualify as a 6 or 7 cap, class B facility with an 80-85 percent vacancy rate.”

As for where the majority of these moves will take place, Murphy says that activity will continue to be concentrated in the downtown market as opposed to the suburban market, where it is still difficult to calculate risk.

“The general feeling is that the downtown market has bottomed out,” says Murphy. “I think we will see more transaction activity in 2011 because of this.”

Debt markets

The debt market was a large element of fueling the commercial real estate boom in the last decade, yet as many banks are still reeling from losses, many lending institutions have remained rather silent the last few years.
Some are unable or unwilling to make commercial real estate loans, while others require such high loan-to-value spreads that deals have been ultimately unattainable.

Last year a thaw may have begun in the debt markets. According to Real Capital Analytics, banks accounted for 38 percent of nationwide office loan originations and the revived CMBS market accounted for 20 percent.

As more debt trickles into the market, more lending institutions are beginning to enter the fray.

“We want to do $500-to-$600 million in lending this year,” says Breck Hanson, executive vice president and head of commercial real estate at Associated Bank. “We are looking at all property types, we are looking at refinances, and, for the right situation, we will consider financing note purchases.”

In 2010, Associated Bank committed to $150 million in commercial real estate loans. Hanson signified that the main purpose for the year was to “clean up the balance sheet.” Associated sold “close to” $500 million in notes last year and raised $500 million in equity to help cover the note sales.

With the heavy lifting behind, Hanson hopes build a stronger presence for Associated Bank based on what he calls a “better picture” of the market.

“Clearly, we think there is an opportunity in this market,” says Hanson. “We positioned our balance sheets so we could attack as a ready and willing participant in what we hope is a revived real estate market. I feel comfortable with the growth goals we have set. It is a good time in the market. Values are lower than replacement costs, competition is checkered or varied depending on other banks, and borrowers have identified themselves in character. We know who the good guys are now.”

Read the full article at http://www.irejofficecentre.com/article/Feature+%7C+Investment/638076/60970/article.html.

Leopardo

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