Nationally, rising consumer confidence levels and the potential for higher wages should carry retail momentum through the year. This is according to Marcus & Millichap’s 2018 U.S. Retail Investment Forecast.
Increased concerns about the impact of e-commerce on store closures have been tempered by historically low completions and strong retail sales. However, the popularity of online distribution, a tight construction lending environment and investor caution are all leading to restrained development.
In Chicago, vacancy has tightened to the lowest level in 10 years as local retailers backfill space. There are also fewer large-scale, multi-tenant projects set for completion, dropping deliveries below the five-year average.
Construction activity has been the strongest in the northwest suburbs. The largest project due this year is the 280,000-square-foot Mellody Farm in Vernon Hills which will include Whole Foods, REI, Nordstrom Rack and Home Goods storefronts. In Buffalo Grove, a 236,000-square-foot center anchored by Woodman’s Market is due for completion.
In downtown Chicago, roughly 300,000 square feet of new inventory is expected this year, mostly as part of mixed-use office and residential projects. Lincoln Commons, for example, will deliver 100,000 square feet of retail and nearly 600 residential units to the former Children’s Memorial Hospital site in Lincoln Park.
Chicago ranks 32 on Marcus & Millichap’s National Retail Index (NRI), a drop of five points from the previous year. This position at the head of the bottom third in the country aligns with the rest of the region, as five of the bottom six markets on the Index were in the Midwest: Milwaukee (#42), Cleveland (#44), Kansas City (#45) and St. Louis (#46).
However, with more clarity in the economy, investor appetite for retail assets in Chicagoland is growing. “Although the pricing gap between buyers and sellers remains, it is beginning to narrow,” the report’s authors wrote. “Investors remain selective, doing extensive and detailed due diligence to ensure the long-term viability of the asset.”
Marcus & Millichap forecast that roughly 40,000 workers will be added to Chicago payrolls in 2018, up from a gain of 26,100 jobs last year. Much of this will be led by growth in the construction sector. They also foresee an increase in asking rents by 1.2 percent.
Following the delivery of 2.1 million square feet in 2017, the pace of construction should ease to 1.7 million square feet this year, mostly in the suburbs. This slower construction pipeline will contribute to vacancy declining 60 basis points in 2018 to 6.4 percent, with a net absorption of 4.4 million square feet.