HEARTLAND SNAPSHOT, JUNE 2009

Chicago Retail Market

According to Todd Caruso, senior managing director with CB Richard Ellis, Chicago’s retail market is weathering the current storm much better than expected. This is being driven, in part, by the market’s lack of oversupply.

“The volume of activity, both on the retailer expansion side and the new development side, has slowed significantly; but we are still, from a supply-demand standpoint, considered a pretty healthy market,” Caruso says.

The recession has affected rental rates, though. Average rates are starting to approach levels not seen since the recession of the early 1990s, but Caruso is quick to add that the current rate is still about 100 basis points higher than it was then. Vacancy is on the rise and, when combined with lower asking rates, the current retail market is favoring those tenants that are still looking for space.

These include fast-casual restaurants, grocers and wholesale clubs. Milwaukee-based grocer Roundy’s is expanding into the Chicagoland market, recently signing a lease at the corner of 39th and State streets. Car service providers such as parts retailers and service shops are also faring well, as people hold onto their cars longer before replacing them. On the flip side, entertainment providers and apparel retailers are faring the worst, as consumers’ discretionary income decreases.

The recession has fundamentally changed the way retailers operate their companies, and Caruso believes that this is not necessarily a bad thing. “The focus today is on profitability versus growth, and that holds true both on the property side and the retailer side — both elements of our business. But I would submit to you that this is probably a healthier metric for Wall Street to be grading these firms, as opposed to how many new store openings you had last year,” Caruso says.

Many new projects have been put on hold, especially those that were in the beginning stages of development. A few marquee projects are still advancing, including Joseph Freed & Associates’ Sullivan Center and Block 37 projects. In Yorkville, Harlem Irving Companies continues to build Kendall Marketplace, an 800,000-square-foot center.

In terms of a recovery, Caruso sees it coming in stages. Once discretionary retailers come back and start expanding, it can be assumed the worst is over. Then, furniture and home-related retailers will return, which can be taken as a sign that the residential market has returned. Rather than examine the retail market as a whole, Caruso believes that looking at how various sectors are doing can provide a more accurate barometer. Caruso believes that this year will see the start of a modest recovery, followed by more substantial gains next year and a rebound in 2011.

“The important thing is that the trend is going to be going in the right direction,” Caruso says. “That trend is going to give people the confidence to lend, and when they’re lending, our market will loosen up.”

— Coleman Wood

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