The REIT paid $6.6 million in property taxes last year on its lone Chicago asset, the 1.07-million-sf 233 N. Michigan Ave., formerly Two Illinois Center in the East Loop. At $6.25 per sf, property taxes on the building are the highest in Parkway Properties' mostly Sunbelt portfolio.

"We like Chicago for other reasons," Rogers says during a recent NAREIT conference. However, even though the REIT aims to buy property at 20% below replacement cost or lower, that price may be going up here quite rapidly, he adds.

"Right now, replacement cost is at the highest level I've seen in my life," says Rogers, 49, pegging it at $250 per sf in Chicago, compared to about $200 per sf in other markets. "It's an extraordinary number."

The price moves have come in a short time frame, Rogers notes, and driven by shortages. "You can't get cement. You can't get steel. Rebar is up three times what it was, and rebar is going to Iraq," Rogers says. "These are not inflationary moves. These are extraordinary spikes in demand."

That demand is being fueled by four Downtown projects—three in the West Loop and one in the Central Loop—that will add another 3.7 million sf to the market. However, 70% of that space already has been leased, according to US Equities Realty.

At today's construction prices, developers would need to net $25 per sf on their leases to generate a 10% return, which Rogers figures would be a minimum number. "I don't know how long it will be this high," he adds.