Spending by newly employed residents and a tempered pace of expansion by retailers will drive further improvements in the Chicago retail property sector, according to a retail market research report from Marcus & Millichap. However, the actual pace of recovery remains unquestionably subdued, the report noted.
Charles Margosian III, senior vice president of Highland Management Associates Inc., said the Chicago retail market has improved slightly, with activity favoring larger tenants such as Verizon, AT&T and Starbucks.
“The tenant activity for the larger-type national tenants has started to pick up,” he said. “We’re continuing to see good tenant demand from the large big-box retailers, albeit discounters who are generally looking for second generation space.
“The market is still very quiet for the users of smaller spaces and neighborhood big-box centers because the depth just isn’t there. They can’t get financing. Unless they’re a national-type user with access to public markets or large balance sheets, we’re not seeing franchisees or small business owners in this market because of a dearth of available funds.”
Projected net absorption of 2.6 million square feet this year represents a positive trend, but equals less than half of the annual amounts recorded in the three years preceding the recession, according to the Marcus & Millichap report. In the city, vacancy has lingered around 7 percent for the last two years and will decline modestly in 2012.
“I think in good markets that are in good locations, the space will get absorbed,” Margosian said. “You may not see centers running at 90 percent-plus occupancies, but I would think that you’ll start to see centers in good markets and in good locations have occupancy improve.
“I think vacancy will slowly come down,” Margosian added. “In most markets, we’re a long way before there’s any meaningful new supply. Until there’s a meaningful influx of new tenants to the market, I think that we’re going to see limited construction of new centers, which will mean that the vacancy rate eventually will start to move down.”
The Marcus & Millichap report also predicts that residential growth in the city and the planned construction of more than 5,000 apartments will eventually jolt retailers to expand more aggressively as residences come online. Elsewhere, strengthening operating conditions at properties in near-in communities of Dupage and Will counties will push down suburban vacancy to the high-10-percent range in 2012.
“I call this kind of a tenuous recovery,” Margosian said. “I think that we are seeing a slow recovery, but I still think that it’s going to be quite some time before we have robust activity in the market.”
Meanwhile, investor demand for grocery-anchored properties persists and discounted shopping centers also continue to trade, according to Marcus & Millichap. For investors in other multi-tenant properties, though, the availability of acquisition loans and determining where rents will reset when current leases roll over remain impediments. Institutional-caliber assets can change hands at cap rates of around 7 percent, but properties with near-term lease expirations trade at more than 8 percent.
The Marcus & Millichap report goes on to point out that investors also remain discriminating in the single-tenant segment, targeting properties with long lease terms and highly rated national tenants. A lack of product in the suburbs with new leases continues to shift investors’ attention to assets with longer leases. Many properties with shorter lease terms continue to sell regularly, but only after investors have determined that the asset is operating soundly. Cap rates here fall in the 8 percent range.
“It seems like what we’re seeing is that those national tenants are still out there and their demand continues to be reasonably strong,” Margosian said. “But there’s still a lack of activity from the moms and pops and franchisees that drive the smaller spaces, which also oftentimes are the most profitable for landlords.”
Margosian added that economic conditions will continue to weigh heavily on the retail market.
“I think that the two things everybody is looking at right now are job growth and consumer confidence from a retail perspective,” he said. “If we continue to have traction, albeit slow growth in the job market, I think the retailers will continue to expand and look for new locations. But if something should happen, such as high gas prices or something that affects consumer confidence, I think retailers will be quick to move and pull back second-half openings.”
