Q2 2012 Chicago, Illinois Retail Market Trends

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Q2 2012 Chicago, Illinois Retail Market Trends

The Chicago retail market may finally be starting to show significant improvement, as vacancy has started to fall and rents have leveled off. This is the trend in the 102-million-square-foot community-neighborhood shopping center segment and in the power center segment, according to Reis. The effects of the recession, however, will be slow to fade amidst a slowdown in debt-driven consumption and competition from the internet. “Vacancy levels will be slow to drop, despite the fact that construction levels are at an all-time low, as an abundance of space is available,” Cushman & Wakefield predicts.

OCCUPANCY


Reis reports a second quarter 2012 community-neighborhood shopping center vacancy rate of 11.6%, down 20 basis points during the quarter and 30 from the peak rate recorded in the third quarter of 2011. The rate has been in double-digits since 2008, and having been below 10.0%, and generally below 8.0%, from 1991 to 2007. The power center vacancy rate is 6.6% according to Reis, down 20 basis points from the prior quarter and from a year earlier. Chicago’s vacancy rate is above the U.S average for both community-neighborhood centers and power centers, but below the Midwest average for both segments. The power center rates are 6.3% for the U.S. and 7.2% for the Midwest.

“The Chicago Retail Market is making an optimistic shift by reporting declining vacancy rates and positive net absorption,” according to a second quarter report by Colliers. “When compared to the second quarter of last year vacancy rates decreased by 0.3% to 8.4%.” Reis predicts the decrease in the community-neighborhood shopping center vacancy rate will accelerate in the second half of 2012, leading to a year-end rate of 11.3%. A slower pace of decline will follow, leaving the rate at 10.8% at the end of 2015, the firm predicts.

SUPPLY AND DEMAND


Community-neighborhood shopping center net absorption has been positive for three consecutive quarters, with plus 212,000 square feet recorded during the second quarter of 2012, the strongest among them. The year-to-date total is 304,000 square feet, compared with just 139,000 for all of 2011. The years from 2008 to 2010 had seen substantial negative net absorption for this type of space, pushing up vacancy, and developers responded by nearly halting new supply. Just 129,000 square feet was added in 2010 and 2011 combined, and just 223,000 square feet is forecast to complete construction this year. None came on line during the second quarter.

For a much larger area including southern Wisconsin and northwestern Indiana, and for all types of retail space, Colliers reports 290,000 square feet of positive net absorption and 1.3 million square feet under construction. “Shopping centers experienced the greatest incline in net absorption with an amount of 240,853 square feet, while power centers suffered the largest, but very modest, decline at minus 34,903 square feet,” according to this source.

Reis reports 160,000 square feet of community-neighborhood space completed construction in August, leaving 254,000 under construction, including 245,000 within established Reis submarkets. Reis predicts new supply in this segment will rise to about 500,000 square feet in 2013 and just over 1 million in the years from 2014 to 2016. While the 713,000 square feet of net absorption forecast for 2012 would exceed this year’s new supply by a substantial margin, the demand totals for the following three years are expected to track new supply closely. Reis, meanwhile, reports 2.1 million square feet of space under construction in the outlet center, lifestyle center, and power center segments. The three power center projects under construction hold 907,000 square feet, with another 4.5 million square feet of power center space in the planning pipeline.

RENTS


Community-neighborhood shopping center rents have been stable to slightly rising for three consecutive quarters. In the second quarter of 2012 the average asking rent was unchanged at $19.08 psf, while the average effective rent edged up a penny to $16.79 psf. Rents are still down, by 0.3% asking and 0.1% effective, from a year earlier, but Reis predicts a four year losing streak on the effective rent side will end this year. The power center average asking rent, meanwhile, is up slightly from the prior quarter and unchanged from a year earlier at $25.23 psf. That is above the Midwest average of $20.91 psf and slightly above the U.S. average of $25.21 psf.

“Still remaining a tenant driven market, the weighted average asking lease rate decreased from $16.12 psf in the second quarter of last year to $15.88 psf foot this quarter; representing a 1.5% decline,” according to a Colliers report for all retail space. Cushman & Wakefield also reports falling rents overall, but this source indicates some pockets of strength including neighborhood centers.

Reis predicts Chicago’s community-neighborhood centers will experience an asking rent increase of 0.5% and an effective rent gain of 0.7% for all of 2012. Gains of under 2.0% during 2013 are forecast to be followed by somewhat higher increases during the following three years. Not until 2014 is the effective average forecast to exceed its year-end 2007 level. Gains in the asking average, meanwhile, are forecast to trail the U.S. average throughout the forecast period.