Retail Real Estate Resurgence in Chicago
Apartments have been the talk of the market since the crash, but it’s local retail properties that are giving investors a bigger bang for their buck.
The one-year total return rate for retail properties in Chicago was 13.2 percent in the first quarter, compared with 12.7 percent for apartment buildings, according to data from the National Council of Real Estate Investment Fiduciaries, a Chicago-based trade association. Hotel, industrial and office properties, meanwhile, posted returns between 7.0 and 7.4 percent.
The numbers, which include income and price appreciation, mark a shift from the past three years, during which apartments returned an average of 16.2 percent per year, vs. 13.6 percent for retail properties, according to NCREIF.
The driving force behind retail’s resurgence: regional shopping malls, which have outperformed older, smaller centers that have yet to bounce back from the recession, said NCREIF Director of Research Jeffrey Havsy. Local giant malls include Woodfield Mall in Schaumburg, half of which was recently acquired by Simon Property Group Inc. in a transaction that valued the property at more than $1 billion.
“Even though retail sales have been struggling, Woodfields have been doing very well,” he said, adding that large malls with restaurant and entertainment options serve as more of a destination for consumers. “That transition on the retail side from just shopping to an experience — that’s part of that.”
Because some retailers will have fewer brick-and-mortar stores, due in part to the rise of online shopping, they’ve become more selective about where they do business, said Dan Fasulo, managing director of Real Capital Analytics, a New York-based research firm.
“Retailing is changing as an industry and retailers are increasingly willing to pay more for the best locations,” he said. “This has come at the expense of kind of second- and third-tier shopping centers, which have seen a massive decline.”
Owners of large malls and high-street retail locations are reaping the benefits, he said, as evidenced by the recent sale of the Barneys department store building on Oak Street. New York-based Thor Equities LLC has agreed to pay a whopping $154 million, or $1,627 per square foot, for the property, nearly a third more than the $117 million than the seller paid in 2011.
While demand for apartments is strong today — downtown and suburban rents have continued to climb — new construction and recovery in for-sale housing could bring the market back down to earth in the coming months, Mr. Fasulo said.
“At some point if you’re multifamily you can’t keep doing double-digit returns every quarter,” Mr. Fasulo said. “It was going to plateau and we’re starting to see things plateau as prices have approached all-time highs.”
Among the investors that have already cashed in on the local apartment market is Northbrook-based Prime Property Investors Ltd., which recently sold a 224-unit apartment community in north suburban Lake Bluff for $28.6 million, a nearly 31 percent increase in less than two years.
In the city, Chicago-based Heitman LLC paid about $157 million for a 250-unit luxury apartment building in Old Town, a record $628,000 per unit.
“I can’t see multifamily declining in any way,” though other property types may start playing catch-up, said Prime Property CEO Barbara Gaffen. “It’s just such a core asset to hold.”
The influx of tech-centric companies into the city will help absorb the new units coming online, she added.
“I think that market’s going to be very strong because of the young generation — younger tech people wanting to live and work” in the city, she said.
On a national level, the Chicago metropolitan area posted the fifth-highest one-year return rate, 10.5 percent, across all property types among the top 10 metropolitan markets in the country, according to NCREIF. San Francisco saw the highest rate, 17.1 percent, followed by Houston, Seattle and New York.
“Chicago is on a lot of people’s radar,” Mr. Havsy said, adding that its central location, diverse economy, strong infrastructure and educated workforce all make it attractive to investors.
The NCREIF numbers include 457 properties in the Chicago area, excluding Lake County. The figures are reported quarterly by management companies that oversee the assets on behalf of the tax-exempt institutional investors that own them.
Going forward, retail and industrial properties stand to gain the most thanks to increases in consumer spending and global commerce, said Robert O’Brien, Chicago-based partner, vice-chairman and global real estate chief for Deloitte.
Despite new construction, the outlook is also positive for apartments and hotels, with the latter benefiting from Chicago’s increased tourism efforts, he said.
But office properties, which have seen little improvement in the way of vacancy, could lag behind other property types as new supply is added to the market over the next few years, Mr. O’Brien said. Developers have proposed more than 10 downtown office projects but only one, River Point, is under construction, according to a recent Crain’s case study.
“Chicago vacancy rates still remain stubbornly high; rent rates really aren’t growing, but we are starting to see some development again,” he said. “So we’re adding supply into a market that, at this point, hasn’t shown at lot of signs of recovery.
Source: Commercial Real Estate Daily - Crains Chicago Business, Abraham Tekippe June 17, 2013