The retail market in Chicago, mirroring that of the nation, has been plagued with vacancies as a result of retailers suffering from lack of consumer demand. From 2003 to 2008, roughly 80 percent of the American GDP was comprised of spending. This means that the country’s output, or contribution to the world, has been focused on consumption. By contrast, from 1990 to 2006, the earnings of individual workers in the United States increased by less than 0.5 percent per year, while the GDP increased about 3.6 percent per year. This consumer psychology led to increased debt and home equity lines of credit given to many unqualified borrowers. The additional debt introduced to the American economy enabled people to spend money on items they were not, in reality, able to afford.
How does this shift in consumption impact retail real estate in the third largest metropolitan statistical area in America? It moves the consumer to buy goods based on need and reduces the retail therapy or impulse buy. In the same way, business owners also make cuts in acquiring goods for luxury and begin focusing on the items needed for basic survival. Add to that a staggering 11 percent unemployment rate in Illinois, which continues to rise, albeit at a slower pace, and the continued fear of increased job loss, and the results reveal a retail industry with fewer and fewer consumers with the desire or the money to spend on goods and services. So, any rebound to the consumers’ previous habits will probably be years away.
The effect on retail real estate is dramatic. If the retailers do not make sales, rent is not paid. If goods are supplied locally, then this affects other sectors of real estate such as the industrial market that warehouses all these goods. The lack of need for warehouses decreases the need for workers and, then, the need for homes and so on. So, what is the way around this for the next couple of years? First, the owners of retail assets have to realize the precarious position tenants are in and why. After this realization, landlords need to act to keep centers occupied and tenants in business. There are many creative solutions, but the tenant basically is looking for reduced rent and reduced commitment. If a landlord believes in the caliber of the operator and the business, then the landlord should help the retailer survive during this market. Although the value of the real estate may drop due to the rent reduction, keep in mind that something is far better than nothing. Also, investors looking for properties should bear in the mind the real rate at which a property will lease if a tenant vacates.
There is still a need for people to buy goods, and that need continues to create some movement in the retail investment market. However, the far-out suburbs are going to be tougher to lease up, so it is recommended to buy such assets at a price that can sustain vacancy and low rents until the economy begins to recover, creating more jobs, homes and population in the outlying areas. However, if one can buy properties in dense, mature areas, whether it is in the city or an established suburb, national retailers will make more of an effort to keep these stores open. National retailers want a presence where there are more shoppers and brand recognition. If the location is right, and there is the ability to hold on to a property and sustain a lower-than-usual rent, the investment may be a good one. Keep in mind our population continues to expand, and there is only so much land in desirable retail locations.
— Chad M. Firsel is president of Oakbrook, Illinois-based Quantum Real Estate Advisors Inc.