It’s been a positive year for many retail landlords in the Chicago area, as rental rates have steadily increased and Q4 vacancy will finish lower than when the year began.
Many landlords have benefited from the tighter market, but with this new dynamic there are challenges as well. New construction, potential retailer consolidation and co-tenancy strategies are all trends that landlords should be aware of and prepare for in 2016.
1. New development will have an impact on the market. As confidence has returned to the market and the availability of Class A space has decreased, developers have initiated several targeted, high-quality construction projects in the top performing submarkets in the Chicago area. These developments will bring some new retailers to the market and achieve higher rents, but will also bring new competition for existing Class A properties, while Class B and C retail centers may struggle to keep up. “It’s a market of haves and have-nots in terms of landlords,” said Parrott. “If you have property in a high demand location with quality anchors, it’s a great market to be in. If not, 2016 could prove to be challenging, so you need to be realistic about how your property is positioned in the new and changing market.”
2. Qualifying tenants is more important than ever. As the market has improved, landlords have often regained the ability to scrutinize tenants more and should thoroughly check a potential tenant’s sales performance, experience, and financial backing. “In the past, many landlords were willing to look past poorly qualified prospects to get a deal done, but now, they have the ability to say “no” to potential retailers,” said Foret. “With so many competing concepts in the same niche, landlords can frequently afford to be selective and ensure they are signing a lease with the strongest tenant possible.”
3. Be aware of co-tenancy and exclusivity rights. Fitness centers and medical users continue to expand in the retail sector. These users can be great to fill vacancies, provided landlords properly plan to accommodate them in their center. “Medical and fitness users can take up a lot of parking for an extended period of time, and these uses will alter the type of tenant who will be attracted to the shopping center in the future,” said Foret. “An owner should have sufficient parking and a clear leasing plan when leasing to these users.” Likewise, Foret says that owners should be aware of exclusivity rights today. With so many different concepts, what may look like competition is actually a separate niche. “For instance, in the fitness market, a yoga center would not necessarily compete with a CrossFit type of gym since they are a different clientele. It will benefit an owner to have an agent who is experienced at negotiating an exclusive that leaves the door open to as much future leasing as possible.”
4. Plan for future rental rates. Rental rates have been steadily increasing for several years. Many landlords cut favorable deals in the years following the recession and they are now coming up for renewal. “Before you commit any long-term deals, it’s always advisable to consult an experienced leasing agent to get a good idea of where the market is going, where the activity is around you and to know what can realistically be achieved in future rents,” said Parrott.
5. Still potential for large closings. Some major retailers have mergers and consolidations in the works, or are having financial challenges, which could result in a lot of new big box space coming on the market during 2016 should a few of these situations materialize. “Landlords need to have a plan to backfill big box space should it become available,” said Foret. “One strategy is to split a larger box up to accommodate several users. There are new national concepts expanding that are looking for these opportunities.”