Forget the days of driving out of your way to shop at your favorite store because we are slowly starting to see those days come to an end—many big retail stores are now just down the block if you’re living in the city. While the number of residents moving downtown continues to increase, far more retailers are following the crowd and seeking opportunities in highly-dense consumer locations, and industry experts agree.
At Illinois Real Estate Journal’s Chicagoland Retail State of the market Conference, keynote speaker Michael Drew, founding principal of Structure Development, shared some noteworthy observations of today’s consumers, beginning by naming the two key groups of consumers that he says are driving forces in accelerating change in the retail world—the baby boomers and millennials.
Baby boomers, he notes, are those reaching their 60s and 70s next year, who have recovered from the 2008 Great Wealth melt-away, and “now have greater financial resources and place a greater emphasis on youth and vitality.”
The millennials are those in their late teens to early 30s, according to Drew. They are the “mobile generation”, being the largest users of smart phones. They came of age in the greatest economic downturn since the Great Depression. He said they will displace ‘boomers’ as the largest buying demographic in the next five years, reaching more than $1.4 trillion by 2020.
“They will dominate purchasing for decades to come,” he stated.
Drew also explained that statistically, the two groups of consumers combined have made Facebook the “third largest nation in the world” with more than 800 million “friends.” In addition to that, he said they spend several hours a week tweeting among the 300 million Twitter users, and have made Pinterest an $11 billion company five years after its founding.
In 2014, 157 million buyers and sellers reportedly spend nearly $18 billion on eBay, and Etsy made $314 million in 2010 and $1.93 billion in 2014.
That’s a lot to take in. His point, however, was to acknowledge that the social interaction of these two groups alone has fueled the engine of e-commerce.
“Retailers beware, ignore this growing trend in e-commerce at your peril!” Drew advised. “Is the challenge from e-commerce so daunting that malls and physical stores are a dying breed? Or is it simply a newer more powerful means of reaching a broader, more diverse customer base?”
But retailers and landlords are not giving in to the power of e-commerce. He said this is why malls are undergoing reinvestment, repositioning and expansion.
Drew pointed out that Westfield’s Hawthorn is spending $50 million, Spring Hill is spending $37 million, Oak Brook Center $30 million, and Randhurst, one of the original malls, underwent a $200 million conversion in the last two years. The Aurora outlet mall has added multiple new stores, and the Fashion Outlets of Chicago have reached an agreement with Rosemont to move its theater to accommodate an expansion.
“We develop in Chicago because it is the best market between the coasts and it is viewed highly among investors as a bargain for quality in a stable world class city,” he said.
Drew sees Chicago as strong market. He is very optimistic about the recent changes within the city, including the appointment of David Reifman as commissioner, and having “Planning and Development” reinserted into the department’s name—a move he calls symbolic.
The gist is that the city has reinvented itself over the last two years. Drew said that between 2000 and 2010, the Loop residency increased by 36 percent, ranking number one in the nation. Additionally, various corporate headquarters have relocated to the city to be among that young, mobile work force now crowding the city.
Marcus & Millichap can vouch—the firm’s Q3 2015 Retail Research report of the Chicago metro area points to grocery store expansions as the main driver accounting of a large portion of absorbed space in suburban retail. Big grocers like Mariano’s and Fresh Thyme Farmers Market are among those that have opened multiple locations in the past year. The report shows that some of the older retail centers in first-ring suburbs are being considered for high-density mixed-use projects.
Developers completed 3 million square feet of retail space in the metro in 2015, according to the firm’s forecast. Approximately 900,000 square feet of that was in the city and 2.1 million square feet in the suburbs.
The 900,000 square feet made up 800,000 square feet that delivered into 2016, plus 100,000 square feet that was renovated. That’s a step forward, although not by much, as the prior four quarters saw 835,000 square feet delivered.
The largest development in 2015 making up a chunk of that number was New City, a 370,000-square-foot project on Halsted Street in the Northwest city submarket. It accounted for nearly 40 percent of 2015 city completions.
Suburban retail construction on the other hand saw a decrease of 2.1 million square feet of retail space during 2015, compared to 2014’s inventory growth of 2.3 million square feet.
Mariano’s four new locations in 2015 accounted for a great portion of that number, in addition to another one underway and scheduled for 2016 delivery. What else is expanding? Fitness centers. LA Fitness added three buildings by year-end 2015.
But of all retail activity in the suburbs, the 290,000-square-foot expansion to the Chicago Premium Outlets in Aurora was by far the biggest project last year, having added 30 new and enlarged stores and about 2,000 parking spaces.
Marcus & Millichap attribute’s the strengthening tenant demand and steady construction pipeline for a market-wide vacancy decrease of 40 basis points to 8.2 percent, while last year’s vacancy saw an 80 basis-point drop.
Among all the submarkets, vacancy was said to be the tightest in the East Loop at 1.9 percent.
Rents for available space in the Loop, along North Michigan Avenue and River North submarkets, averaged more than $50 per square foot.
The North suburban retail market saw one of the largest vacancy improvements, down 130 basis points over the years to bring vacancy to 10.3 percent. This submarket is also seeing some of the highest rents, averaging $19.64 per square foot.
With an average of $17.41 per square foot throughout the metro, asking rents are seeing a 1.8 percent increase this year—city rents will average $28.49 per square foot, while the suburban market asking rent will average $15.13 per square foot.
And let’s not forget that one of the bigger announcements this year was Kraft Heinz’s relocating its headquarters to the city’s Aon Center in a 170,000-square-foot lease, downsizing and bringing 2,300 of its employees downtown.
Marcus & Millichap predicts that due to Amazon’s new delivery service, Amazon Prime Now, several downtown retailers will be affected as the new service—which promises one and two-hour delivery of the company’s products—will expand deliveries to additional zip codes in the city’s near future.