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Retail Landlords Gain Recovery Not Lifting All Boats
Randolph Taylor

Randolph Taylor

Multifamily Investment Sales Broker at Marcus & Millichap
Chicago-Oak Brook
O (630) 570-2246
M (630) 344-9355
Randolph Taylor
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Retail Landlords Gain Recovery Not Lifting All BoatsRetail Landlords Gain Recovery Not Lifting All Boats

The rising economy continues to lift the local retail real estate market, but it doesn't feel that way to every landlord.

The Chicago-area retail vacancy rate dropped to 9.5 percent in the fourth quarter from 9.8 percent in the third.

The market has been making up ground lost at the end of 2013, when the Dominick's grocery chain shut down, dumping millions of square feet of vacant retail space onto the market, Vacancies spiked to 10.4 percent early last year.

Since then, landlords have battled back, benefiting as tenants expand amid increased consumer spending and a brighter jobs picture. Last week, the U.S. Department of Labor said employers created 257,000 jobs in January and that the average hourly wage rose 12 cents to $24.75, the best monthly increase in five years.

A key question as 2015 unfolds is whether economic gains will broaden the retail market's recovery. So far, tenants have focused on the best properties in the strongest parts of the city and suburbs, leaving many second- and third-tier landlords behind.

”GEOGRAPHIC DIVIDE'

“Certainly, it's clear there are fewer national and regional tenants expanding in the marketplace,” said Scott Gendell, president and CEO of Wilmette-based Terraco Real Estate Development & Management. “Notwithstanding that, you do have reasonable amount of activity and selected markets are experiencing robust activity.

“What's clear to anybody is the core areas of the city are growing and development along those corridors will continue to flourish. There is a geographic divide, although suburban development in certain cases is still strong.”

Tenants adding stores in the Chicago area include grocers like Fresh Thyme Farmers Market, discount clothiers including Ross Dress for Less and specialty retailers like PetSmart.

Restaurant groups, including burger joints, a flock of chicken specialists and Potbelly Sandwich Shop, also are expanding here.

Yet a bevy of retailers are closing stores, including Wet Seal, RadioShack and Kmart. Minneapolis-based Target announced in November it would shutter two suburban locations, though it's also rolling out its smaller-format store in the market right now.

SMALL RETAILER LEASING STRONG

“Small-shop leasing in the A centers and A submarkets are really what's driving the numbers lower,” said Joe Parrott, a senior vice president in CBRE's Bannockburn office who focuses on retail. “It's the small shops in quality centers that have been filling up.”

The market is “not lifting all boats. The tide has risen, but for the top 10 to 20 percent of centers out there,” Parrott said. “Those top 20 percent are often full.”

The number of empty ex-Dominick's stores, meanwhile, has shrunk, but it's still big. Of the 76 Dominick's at the end of 2013, 30 are fully vacant, according to Parrott.

"It's a challenge for the owners of those properties because the market share for traditional grocers has been declining for a number of years,” he said. “There may not be enough demand to fill all 76 Dominick's with traditional grocers and those new formats have a different size requirement. To fill the remaining, people have to get creative and split boxes up and redevelop them."

Such dealmaking will likely ramp up as Dominick's old leases with landlords start to expire, Parrott said.

Source: Chicago Real Estate Daily Feb 9th 2015 Micah Maidenberg

Randolph Taylor

Randolph Taylor

Multifamily Investment Sales Broker at Marcus & Millichap
Chicago-Oak Brook
O (630) 570-2246
M (630) 344-9355
Randolph Taylor
SHARE
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High Turnover in Office Ownership Confirms Growing Strength of Secondary Markets

High Turnover in Office Ownership Confirms Growing Strength of Secondary Markets

Office Investors Increasingly Active Across More Secondary Markets Even as Core Gateways Maintain Their Luster.

Last year saw the return of a thriving office investment market, so much so in fact, that several local markets saw significant chunks of their overall stock of buildings change hands in 2013.

Analyzing such office inventory turnover can provide a good barometer of where office investment dollars are flowing, and also reveal markets that offer opportunities for further investment.

"While overall CRE investment volume rose 14% in 2013 from 2012 levels, office sector activity increased 17% to over $104 billion, the highest annual volume recorded for the four major property types,” said Nancy Muscatello, senior real estate economist with CoStar Group.

"Although last year’s haul was still shy of the peak office investment levels we saw in 2007, it does demonstrate the return of strong investor interest in office property, although that wasn’t necessarily the case everywhere.”

Looking at office inventory turnover trends across the top 54 U.S. office markets, five Southern and Western markets saw more 10% or more of their total office market inventory change hands last year: Austin, Dallas/Fort Worth, Atlanta, Houston and Denver. Austin was especially popular with office investors as 13% of its office space was acquired by new owners in 2013.

Six office markets saw just 3% or less of their stock change hands: Long Island, Sacramento, Baltimore, Pittsburgh, Honolulu and Richmond, which posted the lowest turnover of 2%.

The surge in transaction volume in many of these markets was predictable, Muscatello said.

"Houston is a shiny object that investors cannot seem to get enough of, offering a bulletproof demand story and fairly decent yields," as a result trading volume has soared in some key submarkets, she said.

“Austin has also been on the radar of investors for quite some time. The metro had a huge inventory turnover in 2013 (13.1% of inventory,) although a sizable portion of that (40%) was due to portfolio sales," Muscatello noted. The biggest portfolio to trade hands last year in Austin was the sale of the Thomas Properties Group portfolio of five trophy CBD towers as part of the firm’s acquisition by Parkway Properties.

"With a large chunk of the CBD inventory having already traded in this market, I would expect sales to remain strong, but turnover rates to moderate in the near term," Muscatello added.

Chris Hightower, an investment broker with Marcus & Millichap in Austin, said the ownership changes demonstrate the evolution of the Austin market. Historically, big institutional buyers have eschewed the ‘Live Music Capital of the World’ due to its relatively small size compared to major markets.

“However Austin has become real estate darling due to the hard charging Austin economy,” Hightower said.

Meanwhile, some of the nation’s core coastal markets saw relatively lower inventory turnover, including Washington, DC, San Francisco and New York, where just 5% of inventory traded hands. As a way of comparison, the average across the top 54 U.S. office markets was 6.33% turnover.

"Of course, that’s due in part to the size of those markets,” Muscatello noted. “Not only were they at the forefront of investment activity early in the recovery, but markets like New York and Washington DC have office inventories that are much larger than the average market. Investment volume in New York for example, still accounted for 23% of all office sales in 2013, even though New York’s share of the office inventory is only 10%. San Francisco also pulled in an outsized share of sales volume in 2013.”

Andrea Cross, national office research manager for Colliers International, also noted the turnover trend in the gateway markets.

"New York, San Francisco and Boston experienced the strongest demand from investors coming out of the recession, so many office assets in those markets have already traded. Lower inventory turnover in 2013 is attributable to a shortage of available assets and strong price increases in recent years rather than a lack of interest in those markets,” Cross said.

It's not so much that investor interest has waned in those markets, but rather it has expanded to include others.

“Office turnover in markets outside of the core gateway markets has picked up with broader economic growth and higher investor confidence in the office market’s recovery,” Cross said. “We are seeing higher turnover in many markets that were out of favor earlier in the recovery.”

Markets such as Nashville, Jacksonville, New Orleans and Las Vegas all saw 8% turnover in office inventory last year, according to CoStar data.

“Office sales volume is certainly on the rise in secondary markets as the recovery spreads to more markets and investors move out on the risk spectrum in search of higher yields,” Muscatello said.

Source: CoStar Mark Heschmeyer February 26, 2014