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Retail Landlords Gain Recovery Not Lifting All Boats

Randolph Taylor

Multifamily Investment Sales Broker at Marcus & Millichap
(630) 570-2246
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