A growing economy and corporate expansions have led to escalating household incomes, providing consumers increased discretionary funds. According to Marcus & Millichap’s latest market report, retailers have taken notice. Activity in the suburbs improved over the rest of the metro in the last year, while new flagship stores have come to or are planned for Chicago’s urban core.
Flagships look to anchor in the CBD
Earlier this year, New York & Company announced the grand opening of their largest store in the world, an 18,000-square-foot location on Chicago’s iconic State Street. The two-level store includes expanded assortments from all of its exclusive brands. Champion Athleticwear also expanded its retail footprint with a new Wicker Park location, its third store in the U.S.
Additionally, Amazon opened one of its convenience stores in the metro at the end of September. Several other retailers are considering opening flagship stores within the market, including Google and Funko, a company that manufactures pop culture items. Sometime next year, Starbucks will open a 43,000-square-foot Reserve Roastery—the coffee giant’s foray into experiential retail—on Michigan Avenue.
Expansions like these will continue to bode well for vacancy improvement. Net absorption of 3.5 million square feet will tick vacancy down 40 basis points this year to 6.2 percent, making 2018 the fourth consecutive year that witnessed a falling vacancy rate.
Don’t sleep on bedroom communities
In the suburbs, demand outpaces supply. While construction of retail space overall is beginning to moderate after several years of elevated development, the bulk of completions remain in the suburbs. Between June 2017 and June 2018, 1.4 million square feet of space was delivered in the outer submarkets, compared with only 372,000 square feet in Chicago.
Despite heightened deliveries here, strong net absorption continues to sustain demand for retail space, dropping vacancy at a faster pace than the metro average and supporting healthy rent growth. Vacancy in the suburbs fell 50 basis points during the past four quarters to 6.8 percent as 3.4 million square feet was absorbed. In the Schaumburg area, vacancy plummeted 130 basis points during this time.
The average asking rent in the city declined 1 percent during the year prior to June, down to $25.63 per square foot, nullifying a nearly 1 percent gain recorded in the prior annual period. The suburbs were another story, however, as the average asking rent climbed 3.2 percent during the past 12 months to $15.68 per square foot, a healthy boost from the 1.3 percent increase that suburbs notched in the previous year.
Home decor retailer At Home opened a 100,000-square-foot store in Elmhurst last month, proving that big box isn’t dead. In Vernon Hills, The brand new, $200 million Mellody Farm development will include 50 storefronts within the mixed-use property. Moving forward, completions will remain concentrated in outlying areas, though supply additions will likely have a minimal impact on vacancy as much of the space is pre-leased or built to suit.
Buyers in the $1 million to $10 million price tranche are leading transaction velocity in Chicago, with both out-of-state and local investors bidding for available assets. In particular, Californian buyers are targeting properties upward of 200 basis points higher than their home markets. First-year yields for retail assets overall averaged in the low-7 percent band during the past year.
Demand picked up considerably in the Northwest City submarket with the number of sales rising 20 percent in the area during the past 12 months. Heightened demand in the submarket lifted the average price 4 percent to $380 per square foot. Here, cap rates averaged in the low-7 to mid-7 percent range based on property type and location.
The number of multi-tenant transactions over the 12 months prior to June has held steady from the year previous as increased competition lifted the average asset price 9 percent to $265 per square foot. For single-tenant assets, transaction volume fell 4 percent during this time. Properties traded around $345 per square foot on average, up 4 percent year over year.
According to Marcus & Millichap, strip centers should remain popular, particularly in the Joliet/Central Will County and Northwest City submarkets. Buyers remain interested in multi-tenant assets since they change hands with first-year returns in the mid-7 to low-8 percent band, luring buyers to strip centers and other multi-tenant retail subtypes.