Things are brighter in the suburbs.
And it’s true. The vacancy rate for non-mall retail was 11% prior to March 2020 and peaked at nearly 15% at year-end 2020. That rate fell to 12.5% by the end of 2021, and experts expect that number to hit below 10% by the end of Q2 2022.
In fact, Mid-America is seeing a return to pre-pandemic lease rates across suburban markets, not to mention strong sales. In some areas, sales are returning to levels unexperienced since 2017–2018.
A pretty remarkable recovery — and it makes sense. Suburban Chicagoland was allowed to thrive with fewer restrictions on operations during COVID-19, and it affords more opportunity (including more space) for related adjustments like patio seating and drive-thru availability.
As for new development, Mid-America is seeing a high volume of new retail, restaurant and entertainment entries. Retailers who survived have emerged ready to invest in existing stores and continue infill and repositioning.
Established grocers thrived during COVID, but entries like Amazon Fresh have, too, fueled a number of new developments and redevelopments. But grocery is just category of several that are, at last, blooming again.
Entertainment, for example, has resurged at an unexpectedly fast pace.
“There have been several new entries to the market,” Graham said, “along with very strong restaurant activity for both full-service and QSR concepts, as well as fitness uses. We’ve also seen significant expansion among home furnishings, that performed very well during COVID-19, and within the sporting goods, apparel and beauty categories.”
It’s safe to say there’s growth across the board, but there are a few trends that stand out above the rest, and they’re all to do with the category that arguably suffered the biggest blow. That is, the traditional shopping mall.
Mall retailers are having to reinvent the wheel, and Graham said many retailers are engaging in mall relocation, furthering the pre-pandemic trend of reinventing existing malls or de-malling weaker malls for eventual repurpose.
“Essential businesses within malls that would have otherwise been permitted to operate during COVID-19 were not able to do so,” Graham explained. “Those tenants are rethinking their strategy going forward and looking for open air opportunities.”
Optical is just one example. The business would not have been subject to limitations, but customers were unable to access in-mall storefronts. Tenants are more aware of open-air opportunities, and they’re seeking to open stores outside malls, close mall stores, or both. Furthermore, Mid-America is seeing increased ingenuity in terms of retailers strengthening their omnichannel platforms, and creativity has been accelerated in terms of how retailers serve their customers.
There are several new development and redevelopment projects that are well-timed with current demand and more limited existing vacancy. Mid-America is also seeing a return to favor for retail for investors including several new-to-market owners with exciting redevelopment plans.
But it hasn’t been smooth sailing. Various headwinds continue to pose a threat to the market’s steady recovery, despite its current high.
Rising construction costs and supply chain delays have challenged landlords and tenants and continue to impact and delay tenant openings. These issues aren’t new, but they are worsening. Without near-term stabilization, Mid-America expects a pause in the current level of deal activity because of delays in the build-out of spaces.
And Downtown Chicago is experiencing no different. Rising interest rates are causing an ever so slight pause in investment/sales velocity, as confirmed by Austin Weisenbeck and Sean Sharko, Senior Vice Presidents of Investments at Marcus & Millichap.
“Much of the transition is related to a disconnect between a portion of the buyer pool,” Weisenbeck and Sharko explained. “When rates rise like they have, a portion of the buyer pool expects an immediate adjustment in pricing or moves to the sidelines. But prices don’t adjust that quickly. The average escrow is about 75–90 days, and it takes time for comps and data to hit the open market to reflect a change in overall pricing.”
It’s still a product constrained market, as there are still more buyers than sellers, with not a lot of quality inventory. Experts have not seen the price adjust yet, but it’s only a matter of time. More inventory is coming online, and interest rates continue to trend higher.
All things considered, though, Downtown Chicago is recovering at its own pace. Operations continue to do well, and tenants are recovering with fewer roadblocks. Tourism is also bouncing back, as is housing, and rents are stabilized. It’s a healthy market overall, with an abundance of capital chasing few opportunities, according to Marcus & Millichap.