Illinois Real Estate Journal recently spoke to Keely Polczynski, vice president at CBRE, about the strength of the retail market in the Midwest’s largest city. Here’s what she had to say.
Illinois Real Estate Journal: Has the state of the Chicago retail market improved?
Keely Polczynski: Statistically during the second quarter of 2013 our vacancy rate decreased from 8.8 percent to 8.6 percent over the previous quarter. So that’s a 20 basis point decline from one year ago. Our net asking lease rates rose this quarter to $17.18 per square foot, which is the highest rate since 2008. There are a number of retailers expanding and the investment market is extremely hot right now. There’s a consensus in the market that interest rates are rising and that they’re going to start to rise more rapidly either toward the end of the year or the beginning of 2014. That’s got a ton of investors looking for deals to lock in those low interest rates. Because the demand is higher than the supply, the market has been great.
IREJ: What are some of the issues or trends shaping the marketplace?
Polczynski: I think the broader economic picture is what’s really driving the Chicago market. If you look at U.S. retail sales, they rose 2 percent in July according to the Commerce Department. That points to an acceleration in consumer spending that could bolster the case for the U.S. Federal Reserve to wind down their major economic stimulus program that they’ve been involved in. (Federal Reserve Chairman) Ben Bernanke said last month that the U.S. Central Bank could begin reducing the monthly bond purchases, which are aimed at lowering borrowing costs and reducing unemployment. He is saying that may happen by the end of the year. There are other sources who are saying that could happen as soon as September. Right now the Fed is buying back about $85 billion in long-term bonds per month. A lot of economists expect that the Fed will begin tapering that process in September. Yields on government debt also rose recently, which is a sign that investors believe the chances of the Fed tightening its policies have increased. In July, retail sales jumped 6.6 percent in U.S. department stores, which is the biggest gain since March of 2012 and there were also strong sales in U.S. health and personal goods stores.
IREJ: What types of retailers are most popular right now?
Polczynski: New retailers entering the Chicago market in 2013 and 2014 include Ross Dress for Less, which signed a new lease at 20-28 E. Randolph St. This is their first urban store. It’s 27,000 square feet. There are four new fashion houses that are coming to Oak Street. In late summer 2013, Dolce & Gabbana, Ike Behar and Carolina Herrera are all slated to open. Tom Ford will also open in late 2014 on Oak Street. So luxury has been a hot market. There’s a new fast casual dining pizza concept coming to the area called Blaze Pizza that’s out of Pasadena, Calif. They are signing a lease for 2,300 square feet on West Belmont in Lakeview. We also have kind of a bedding war. We have a lot of mattress retailers. There are two new mattress retailers that have recently entered the market. One is Art Van Furniture. They are out of Michigan and they recently opened in a former Dominick’s at Orland Greens Shopping Center in Orland Park. That was a 46,000-square-foot Dominick’s. They signed a 10-year lease and spent $2 million to build out the store. They plan to open five stores by the end of the year. That’s pretty aggressive. They also opened a 183,000-square-foot distribution center in Bolingbrook, so they’re really planting their flag here. The other one is Sleepy’s. They are more of a traditional mattress retailer. They have 800 showrooms, mainly in the Mid-Atlantic region and in the Northeast. They opened in Orland Park at 159th Street and Harlem Avenue and they opened on 95th Street in Evergreen Park. They’re also negotiating several deals in the city right now, so they’re very active.
IREJ: Will there be much expansion by retailers this year?
Polczynski: The big retailers that are focused on Chicago right now, a lot of them are looking at urban markets. Target has plans to do a City Target at the corner of Belmont, Lincoln and Ashland, which is a smaller concept. They will open their full Target on Division, and they’re very aggressive. Whole Foods is still very aggressive in the city, and then we have some smaller format grocers like Plum Market, which opened at Division and Wells. They’re very aggressive but they’re very careful with their expansion plans. And then you’ve got everyone speculating on Jewel and Dominick’s. Jewel was recently purchased by a private equity firm. I think they’re repositioning some of their stores. They have such great real estate as does Dominick’s. So there’s still a lot of speculation in the market as to what the fate of Dominick’s is ultimately going to be.
IREJ: Will much of the space that’s out there be absorbed?
Polczynski: Construction is picking up albeit slowly. You don’t see any spec projects. People aren’t building until they have commitments from the tenants and there’s a flight to quality. So people are looking for key intersections and are really looking at the strong underlying fundamentals of the real estate. The fact that construction is slow will help absorb the vacancy that we have, but there is still going to be a flight to quality. So in the B and C markets, you’re still going to see some vacancy.
IREJ: Are investors favoring multi- or single-tenant properties?
Polczynski: It depends on the investor. I see people focused on term of the lease and the credit of the tenant. Multi-tenant investors feel like their diversifying their risk. Single-tenant investors tend to favor those properties because they’re very easy to manage and they’re very hands-off. Right now you can still get 10-year money at very attractive interest rates, so if you have a 10-year lease with a credit tenant, you can pay a much more aggressive cap rate.
IREJ: Is an improving job market having an impact on retail?
Polczynski: I think the overall sentiment is that things are getting better, but if you look at the unemployment rate, even though it’s slightly better, it’s still historically very high. In August, we typically see a big uptick in retail sales because that’s the big back to school shopping season. It can set the tone for the calendar year retail sales, but if you talk to retailers, a lot of the sales that they had were for more needs-based products. I think people are still cautiously optimistic.
IREJ: What traits does Chicago possess that help its retail market even in today’s economy?
Polczynski: We’re a 24/7 city. We have a vibrant downtown and we have vibrant neighborhoods. We’re the most similar city to New York City that there is in the country. There’s a big sentiment among investors all over the country that Chicago is somewhat untapped. We still have a lot of these neighborhoods that haven’t quite turned. For instance, you have the West Loop, which is very similar to the Meat Packing District in New York. We have great restaurants over there, and I predict you will see fashion over there at some point.
IREJ: Are you seeing any signs that retail is heading for a stronger recovery?
Polczynski: We do see cap rate compression right now because the supply is outweighing the demand. It’s all going to depend on what the Fed does, and if they back off on their quantitative easing or the 10-year Treasury rates start to creep up, I think that’s going to create inflation. I think that it will create upward pressure on cap rates. For the balance of this year, I think we’re fine, but I think things may change in the first quarter of 2014.
