CRE Midwest

State of the Market: Retail on the rebound; Chicago office, industrial gain strength

Inland Real Estate Acquisitions’ Joe Cosenza really made quite a splash at Wednesday’s 12th Annual Commercial Real Estate Forecast Conference, literally.

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Inland Real Estate Acquisitions’ Joe Cosenza really made quite a splash at Wednesday’s 12th Annual Commercial Real Estate Forecast Conference, literally.

Cosenza briefly stunned the audience when he intentionally fell off his chair to make a point about the retail market’s economic cycle. Similar to someone who has slipped and fallen, Cosenza equated the retail market as having gone through an “ouch period,” an “I’m OK period” and an “embarrassment period.”

Cosenza explained his metaphor during the conference’s State of the Market panel moderated by Gunnar Branson of the National Association of Real Estate Investment Managers. Other speakers on the panel were: Tony Smaniotto, Colliers International; Tim Hennelly, Ryan Companies US Inc.; Todd Mintz, DTZ; Drew Nieman, US Equities; and Michael Flynn, NAI Hiffman.

Cosenza said the ouch period was from about 2009 to the beginning of 2013 when 200,000 small businesses went bankrupt. Occupancy during this period was about 92 percent for anchor stores.

The I’m OK period was during 2013, according to Cosenza.

“In 2013, I don’t have one single small guy going bankrupt and I don’t have many small guys going out of business,” Cosenza said.

Also in 2013, occupancy ranged from 93 to 97 percent and more tenants renewed their leases than during the ouch period.

However, during the embarrassment period, the market last year experienced the lowest gain in holiday sales since 2008 at 2.3 percent, according to Cosenza. Part of the reason for that performance is that online retail sales are up 10.3 percent, he said. Also, several big chains are closing stores, including Dominick's, Sears, Albertson's and J.C. Penney.

On the office side, Flynn noted that the buildings that are better positioned and better differentiated from others are capturing the market demand and pushing the suburban office market vacancy rate below 20 percent for the first time in more than five years. The buildings that have the appropriate amenities, infrastructure and vision going forward will continue to be well-positioned, he said.

Flynn added that the key to the suburban marketplace involves the owners. He said that if owners can differentiate their building and provide the parking, access to transportation or amenities tenants are looking for, the building will still do well in today's market.

In the city, there have been reductions in vacancy and contiguous blocks of space, according to Nieman, who added that last year was a good year for companies migrating from the suburbs into the city. One trend that has really taken hold this year is the "densification of office space," he said.

Mintz agreed, noting that for office, the trends going forward are going to revolve around density and space usage. Locally, companies will continue to want to move downtown or have a downtown office because there is a draw to being in the city, he said. “I do believe that there will be a cycle where things become too dense and companies will spread out a bit, but for now the trend is to increase density,” he added. Mintz also predicted there will be an increase in building renovations downtown in 2014 and 2015, similar to what is going on at the Wrigley Building. A few buildings, like Prudential Plaza and Citadel, will be going through the renovation process over the coming year, Mintz said.

There is also a demand for new construction, Nieman said, adding that among the 15 million square feet of office buildings constructed downtown since 2000, the vacancy rate among those buildings is around 4 percent, compared to 12 percent or higher in the overall market.

On the tenant side, Mintz said users are trying to be more conscious of how they are using their space, more aware of environmental factors and more careful with how they are laying out their space. As a result, many tenants are taking their time making decisions, he said. Mintz also noted that a lot of the businesses that survived the downturn have recovered, but companies are being more thoughtful today about their business decisions and how they think of their office space.

Smaniotto, meanwhile, said that on the surface, the investment market seems to be doing great. Many investors, though, are still concerned with the fact that Chicago lags the rest of the country in jobs. However, the city that works keeps on chugging along, Smaniotto said. “Last year we did about $3.7 billion in transactions, compared to $2.6 billion and $2.8 billion over the previous two years,” he said. The bulk of interest downtown last year came from investors looking for core product, but now investors are willing to take higher risks and potentially realize higher yields moving into the market, Smaniotto said.

In terms of industrial, Hennelly said the current vacancy rate has dropped to around 8.3 percent or 8.4 percent. “One trend we've seen is the redevelopment of buildings, especially in Elk Grove Village and near the city, where buildings are being retrofitted with higher ceilings and larger truck courts to accommodate today's market,” he said. Large companies also are consolidating from several buildings in the market into large, modern facilities. Meanwhile, clear heights continue to rise, he said, noting that for the past 10 or 15 years, the norm has been 30-foot clear buildings. Now, 32-foot clear is the standard, while there are also buildings being built with 40-foot ceilings, according to Hennelly.