By Chris Irwin, Colliers International
As we begin to lower our masks, breathe fresh air and see smiles on everyone’s faces, there are strong signs that better than pre-COVID retail activity in Chicago is here.
With the expanded vaccine rollout, a decrease in unemployment plus the added boost of stimulus checks, the surge in retail sales in the city and surrounding areas has been measurable. The demand for retail space increased in fourth-quarter 2020 and first-quarter 2021 significantly, with the first quarter recording a 650,000-square-foot increase in overall absorption, which pushed the trailing 12-month absorption back to positive territory — and its highest level since 2017.
Chris Irwin, Colliers International
Increased leasing activity continued to drive new demand as net absorption totaled almost 1 million square feet in the first quarter. Vacancy in Chicago retail has flattened and currently is holding at 6.1 percent over the past year compared with a rate of 5.1 percent nationally. Leasing activity was driven by the expansion of essential retailers throughout the first quarter, similar to first-quarter activity levels registered in 2017, 2018 and 2019.
However, the most important step toward recovery happened June 11 when the State of Illinois moved its Coronavirus response from Phase 4 to Phase 5. The anticipation alone of moving from the more restrictive Phase 4 to the bridge to Phase 5 fueled the surge of post-pandemic demand, thus keeping vacancy relatively flat (compared with the past year) and slightly lower than the national average.
Retailers contributing to this revival include discounters such as Dollar Tree and Big Lots, sporting goods retailers such as Dick’s Sporting Goods, home improvement stores such as Home Depot and grocers such as Amazon. Retailers continue to evolve and respond to consumer demands in a post-pandemic world. Hard-to-fill boxes like a 47,000-square-foot Hobby Lobby, which is being converted into a Binny’s at the Hawthorn Village Commons in Vernon Hills, is just one example.
Cost to owners
Although there has been increased demand, it has come at a cost to owners. Retail rents have decreased approximately .08 percent over the past year and landlords have become more aggressive negotiating in an attempt to reduce long-term vacancy. Areas with some of the largest declines and vacancies are in and around the central business district, which has been impacted by a loss of daily foot traffic as office workers and tourists stayed home.
Moreover, the most significant declines in rent and increased vacancies are most apparent in the mall segment. While there were difficulties in this segment pre-pandemic, it became more pronounced in the last 15 months as consumers almost exclusively shopped online for health and safety reasons.
While the old mall model continues to struggle, there has also been a lack of speculative new supply as most of the 1.4 million square feet of new retail projects delivered during the pandemic were leased before delivery. This is due in part to the fact that the State of Illinois has been impacted by more than the pandemic over the past 18+ months. Increased Illinois taxes continue to contribute to increased rents, which are then passed along to middle-income Americans who frequent these retailers.
Population shift
As consumers watch their cost-of-living expenses go up, it is no surprise to see the shift in population as people leave Illinois looking for a better lifestyle, lower cost of living and warmer weather. Hence there have been increased transactions from local developers who are now active in Nashville, Austin and Salt Lake City.
Metro Chicago will continue to lose population but not everyone is moving to another state. The exodus from large metro areas with work-from-home policies, public health shutdowns and civil unrest has also led to millennials and others moving to the suburbs of Chicago. Families seek additional space, more educational opportunities and a better sense of community. This suburban exodus emphasizes the importance of excellent retail centers, particularly those anchored or shadow-anchored by a supermarket, which outpaced most of all retail during the pandemic.
History shows that retailers must evolve or die. Did you know that Sears used Amazon’s model 100 years ago, but they did not evolve? Most brick-and-mortar stores expect to modify their footprint in some way over the next three years. Eight out of 10 retailers will add to their services, including online collection and ship from a store in the ever-evolving omnichannel that has affected the way all of us shop.
The average size of a retailer’s space has decreased over the past few years with an average size leased in the first quarter of just 2,900 square feet. This is in line with a retail tenant’s evolution, a pandemic pivot and a shift in shopping habits by clients. In order to appeal to more consumers, retailers continue to experiment with store layouts and store sizes, new technologies, as well as new strategies that blend online and offline shopping.
Meanwhile, just under half of the retailers plan to close or reduce their footprint over the next five years. While these changes have helped create consumers who are open to, and comfortable with, non-traditional forms of shopping and retail experiences, landlords are struggling to backfill larger retail properties.
Chris Irwin is senior vice president with Colliers International Chicago. This article originally appeared in the June 2021 issue of Heartland Real Estate Business magazine.