WEDNESDAY, MAY 20, 2009
by Richard KehoeChicagoWith more than 435 million square feet of retail real estate, Chicago is one of the largest retail markets in the United States. But, as we know all too well, many investors are sitting on the sidelines here and across the nation.
However, even amid frozen credit markets, one of Chicago's smallest retail asset classes continues to see strong activity from investors. Well-located neighborhood strip centers, 30,000 square feet and less, have continued to generate interest from investors. Small retail properties provide necessity and value-based goods and services, have lower vacancy rates, strong cash flow and are easier to finance than large retail properties.
In the Chicago market alone, more than 760 shopping centers smaller than 25,000 square feet were sold in 2008 for approximately $1.2 billion. According to industry data, just over 80 larger centers sold in the same time period.
Essentials are GoodRight now, overall softness in consumer spending and consumer confidence is back to levels not seen since the 1980s. At 9.1 percent, unemployment in Illinois is higher than the national average. Every sector of investment real estate is taking a hit from the negative psychology of the market. As jobs go, so does the demand for retail real estate and vacancies are on the rise, reaching 8.5 percent in the Chicago area in the first quarter of 2009.
Although overall retail sales are down, sales of essential goods and services are showing a small increase. Because small neighborhood centers fulfill a need in the community by providing small grocery or convenience stores, fast food, dry cleaning and banking services, they maintain a more consistent tenancy when compared to larger power or regional centers.
Solid FundamentalsSmall neighborhood properties remain popular investments primarily due to their locations in densely populated urban and suburban infill areas with high barriers to entry. These locations are doing well and may not be experiencing the recession to the same degree as far outlying areas, or those with significant housing problems.
Recently, two small Chicago retail centers, Howard and Western Plaza, located in
West Rogers Park, and Wisner Milwaukee Plaza, located in Logan Square, sold for over $5.8 million to a locally-based investment group. Both centers are less than 15,000 square feet, and house a strong mix of necessity and value-based tenants including Family Dollar, Harris Bank and Subway. These assets were not speculative, had clearly established cash flows and were located in densely populated areas, making them well-positioned in the current economy.
Financing is KeyBoth Howard and Western Plaza and Wisner Milwaukee Plaza were easier to finance than most alternative properties, which is the case with many well-located neighborhood centers. Financing has not been as great a problem with smaller cash flow properties like these.
Neighborhood centers provide essential goods and services, have long-term leases and can demonstrate a strong income stream. Tenants also carry less overhead because of the small size of their stores. And, many investors can demonstrate a track record with similar smaller properties, all of which significantly influences an investor's ability to receive financing.
New inclusions under the Term Asset-Backed Securities Loan Facility (TALF) plan should stimulate lending and transactions in the commercial real estate investment market starting on June 1, which will help small and large retail real estate properties to sell or refinance.
The Price DifferentialEven with a catalyst for lending, retail real estate pricing will continue to be a hurdle. Values are down across the spectrum. Sellers are not yet willing to lower their prices to a level that buyers will accept. Prices need to bottom out before a significant change will occur, which will probably occur within the next two-to-three years. Fortunately, this has not been as substantial a problem with small neighborhood centers.
Both buyers and sellers of this type of property are hyper aware of the factors affecting today's market. A fair price is achieved through tough, fair negotiations and detailed due diligence, the same in good economic times as in challenging ones. In the case of small neighborhood centers, the parties are coming together by clearly defining the property's investment value. This asset class is more predictable than most investments, and provides a safer return.
In an uncertain economy, opportunities for success are always present. Investors can find stable returns from small neighborhood strip centers due to their location, condition, tenant mix and potential for future performance.
Richard Kehoe, senior vice president of
Inland Real Estate Brokerage, Inc. has over 30 years of experience in general investment real estate, and specializes in retail properties. Kehoe is also president of Inland Auctions, Inc., a division of Inland Real Estate Brokerage. He is a licensed real estate broker in the states of Illinois and Wisconsin.
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