FEATURE ARTICLE, FEBRUARY 2009

Q&A On Topic:

Jason Berngard, a broker with Chicago-based Baum Realty Group, answers our questions about retailers expanding in Chicago.

HREB: Have you noticed any specific retailers focused on expanding?

Berngard

Berngard: There are definitely some retailers still expanding, even though it has slowed down dramatically. Retailers are being more selective. They are looking for better deals. They are much more rent-sensitive right now, and they are not doing as many deals. It is hard for me to name one retailer doing 25-plus deals in 2009 in the Chicagoland market. A couple years ago, I could rattle off 10 retailers that were doing 25-plus deals. The market has definitely changed.

That being said, there are some retailers still expanding. For the most part, quick-service/full-service restaurants are the lead category in terms of doing or looking for deals right now. Five Guys [Burgers and Fries] is trying to penetrate the market. It has opened up one store in the western suburbs, and just opened up another store in the Lincoln Park neighborhood. Jimmy John’s [Gourmet Sandwiches] is a sandwich operation that is looking to expand. Sonic is growing, which is all franchise-driven. Qdoba and Chipotle are still strategically growing. Red Robin is looking for deals. Dunkin’ Donuts is very active on a franchise level. And, Buffalo Wild Wings is also looking for deals right now.

The only bank that is really expanding, and it has slowed down, is Chase. There are some auto users [such as] Advance Auto, Firestone and Auto Zone that are looking for new opportunities to expand. Xsport Fitness, which has a smaller, 10,000-square-foot concept, is looking to expand in urban markets. Life Time Fitness is also looking to grow. There are some grocery stores, [including] Roundy’s [Supermarkets], which is looking to penetrate the market, and Dominick’s is slowly but surely looking to relocate a couple stores and thinking about new opportunities in the Chicago market. Also, ALDI is actively pursuing deals.

HREB: What is unique about these retailers that has allowed them to continue expanding?

Berngard: You really have to start examining each category. For the most part, they are lower-cost providers. People continue to trade down right now, and the people who may have been eating at a [The] Cheesecake Factory or a Wildfire, might now be eating at a Buffalo Wild Wings, Red Robin or Chipotle. The people who used to shop at Whole Foods Market might be shopping at Jewel or ALDI now.

Also, it does not matter what the economy is like, everyone still wants to work out. Even though a gym membership might cost you $60 to $100 per month, it is still a cheaper way to spend your time and stay healthy and fit, which is why LA Fitness and
Xsport Fitness are still growing.

People who used to go buy a new car are now taking their car in to get fixed. Instead of buying a new car after 50,000 miles, they are trying to extend the length to 100,000 miles; therefore, the Advance Auto’s and the Auto Zone’s are thriving in this market. The dollar stores are hot and looking to expand for apparent reasons.

These companies are all well-capitalized and have grown strategically over the past several years. I also think there are some good lower-rent opportunities out there that tenants are trying to capitalize on.

HREB: Are the expanding retailers getting great deals in today’s market?

Berngard: Retail sales were down 2.7 percent in December, which is greater than [retailers] expected. That being said, there are some good deals out there in the market right now. We have seen rents drop dramatically, anywhere from $5 to $10 per square foot in some markets. It has really become a new day, and it is a tenant-driven market. In the past, it has always been a landlord-driven market. Tenants these days seem to have more control over the negotiation process. Some landlords are getting more motivated to lease space; therefore, there have been some really good opportunities for retailers that are evaluating sites.

I have even seen landlords offer substantially cheaper rent deals for years 1 through 3 in order to get [retailers] through this down cycle. Then, after the second or third year, [the rent] bumps up to what we would think is a market-type rent, which has been an interesting alternative. I have heard about landlords with large vacancies due to recent retailer bankruptcies approaching temporary users like party stores and lower-cost providers, and actually doing a zero-rent deal. However, the tenant would pay taxes and operating expenses; we have not seen anything like this for years.

We are hearing about several national and local retailers evaluating their entire portfolio, and hiring companies to look for rent concessions to balance out their portfolio, especially on deals that have 1 to 3 years left on the lease.

HREB: Where are retailers looking to expand?

Berngard: [The focus] is definitely in  high-density urban markets with high-income populations. Another key factor in decision making is disposable income. Just because there is high income, does not mean people are out spending money. And especially in today’s economy, retailers are much more sensitive to how much disposable income [is available]. We don’t have hard disposable income [data], but there is a tendency to associate certain markets with high levels or low levels of disposable income. The city is still very competitive, especially in the loop, where the vacancy level is not too high. However, as you start going outside the city — especially in the greener markets — I would say that retail expansion has come to a stop.

However, retailers are still looking at power centers on major retail corridors with successful anchors that have a history of high sales volumes. There is also more focus on how other retailers are doing [in a certain market]. Basically, retailers are being more methodical and cautious when evaluating a site.

HREB: Are most of the expanding retailers still signing long-term leases?

Berngard: National tenants are still looking to sign the 5-year to 10-year initial term deals, with anywhere from two to three options. Local tenants might be a little bit different. They might be looking for a shorter-term deal. But it is a good opportunity right now to lock-in low rents over a term of 5 to 10 years. The national tenants typically get a vanilla box. It costs them a substantial investment to build out a store, and they want to amortize the costs over a longer initial term. So we have not seen them reduce the time frame when negotiating offers.

But we are seeing landlords pushing to sign below market rent deals for only 3 years just to ride this down cycle out  until things get a little bit better. But they are definitely getting some push-back from the national tenants. The nationals typically need a 5-year or 10-year initial term. They can’t spend the initial investment and get it approved by their committees without amortizing the cost over at least 5 to 10 years. q

HREB: Is there anything unique about the Chicago market right now that is encouraging retailers to expand?

Berngard: There has been a lot of buzz this year surrounding Chicago. It has been an international news city; for example, we have had several stories about the Olympics and President Barack Obama is from Chicago. It is really becoming more of an internationally renowned city, and international global tenants are seeing Chicago as a market to penetrate. In the United States, attention has always been on the coast. The high-end fashion, international tenants are looking in Los Angeles or New York City. Now, tenants like Michael Kors, De Beers, Monte Blanc and Marc Jacobs are saying, ‘Chicago is a place where we think we can [capture a] high sales volume.’ So we are seeing a global buzz, and we are seeing international tenants take a strong look at this market. And they are not looking in the suburbs. They are focused in the East Loop, Gold Coast, Bucktown, Lincoln Park and River North areas.

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