The retail market posted another strong year in 2016. According to CBRE research, the U.S. has experienced 12 consecutive quarters of positive year-over-year rent growth. Net asking rents averaged $16.59 per sf. ft. nationally in Q4 – up 4 percent from Q4 2015 and 8.3 percent from the cycle low for $15.32 in Q4 2013.
Chicago is tracking rents higher than the national average at $18.54 per sq. ft., which is up from $18.36 the previous quarter.
While the fundamentals have been strong, there could be higher vacancies on the horizon as several national anchors might be shuttering more stores in the coming year. This may put pressure on landlords as tenants will have more options and competition for large leases will increase.
- Big box absorption is slowing down – Chicago saw several big box stores vacate the market in recent years. Many of the prime spots have been taken up, but the remaining spots may linger for a while, and, with potentially more big box vacancies coming on line, velocity on big box leasing could slow down even more. According to CBRE, anchor spaces leased in 2016 were on the market for an average of 39 months, up from 32 months the previous year. Unleased anchor spaces have been on the market an average of 51 months. “The good spots are always filled quickly, but if a spot has been vacant for several years, it likely has a challenging location and we shouldn’t expect to see a lease anytime soon as even more options will hit the market this year,” said Parrott.
- Slowdown in mattress expansions – Mattress stores have been a big driver of activity in the Chicago retail market in recent years. However, that will likely change this year. “Several consolidations in the industry have taken place in the last year, which will make this segment less active,” said Foret. “We can’t expect mattress firms to be the driver that they have been.”
- Fitness boutiques drive activity in city and suburbs – However, while mattress firms may slow down, a lot of activity is now coming from the fitness industry, especially niche fitness centers. As Foret recently told the Chicago Tribune, “Fitness continues to be one of the most active categories in the retail landscape — and highly specialized, too. Niche workout clubs offering classes for about 20 people for an hour or less in spaces ranging from 1,500 to 3,000 square feet are as active as they’ve ever been on the retail scene.” This will be a key driver of foot traffic in suburban retail developments and will be active in urban neighborhoods as well.
- Anchor tenants might have to be more lenient on restrictive covenants – Historically, anchor tenants at suburban retail developments have restrictive covenants that prohibit other tenants such as fitness and medical users leasing space. However, these restrictive covenants were typically in place to prevent a mega gym or a large medical center from occupying the same development. These industries have changed their retail strategies and can potentially be a benefit now. “As the fitness and medical industries have evolved to offer different services and business plans, mainly smaller, more-targeted offices and operations that offer faster services, they can be beneficial co-tenants that drive frequent consumer traffic,” said Foret. “As on-line retail continues to increase, owners need to find other users to fill developments. These users have become an excellent option.”
- Decline in department store sector affects malls. The department store sector is in decline, through closings and a loss of market share, which continues to have an effect on enclosed malls. Several national retailers have recently announced nationwide closings and Chicago will be affected. According to Parrott, there are now 10 mall department store spaces on the market in the Chicago area. “As more department store anchors leave enclosed malls, owners will have to find creative solutions to backfill the space and competition could put pressure on rents,” said Parrott. “One sector that has become viable option for mall owners is the theater industry, which is growing.”
- Theater industry expands as competition heats up. Some theatre exhibitors have successfully challenged the major movie studios’ practice of granting clearances (or protected zones) and now new theatres are able to open in closer proximity to other theatres. “This should bring a new element of competition to the movie theater business, and, landlords can now look to theater chains as options more often, whereas they may have been restricted in the past,” said CBRE’s Parrott. “This will offer relief to owners looking for solutions to backfill vacant department store space.” Many theaters are also converting to recliner seating, which has led to scrambling by operators looking for viable locations. This has given many mall owners with dark anchors an opportunity lure in new theater chains, Parrott added.