By Mary Schaefer, MORe Now Contributor
With office and retail vacancy rates falling and rents rising moderately, the
Chicagoland commercial real estate market is showing continued signs of improvement in market activity while the multi-family sector continues ongoing expansion.
“This has been a good year for the commercial sector,” said Paul Martis, a
commercial REALTOR® with Coldwell Banker of Oak Brook and chairman of the Mainstreet Organization of REALTORS® commercial committee. “With an uptick in residential sales and new home construction, this translates into a surge in commercial market activity and in particular for the retail sector.” Martis also sees more commercial investment opportunities. “It is not just the national banks but local community banks that are looking for opportunities to fund investment in their communities,” said Martis.
According to the National Association of REALTORS®,
retail vacancy rates are estimated to ease from 10.5 percent in the second quarter of this year to 10.2 percent in the second quarter of 2014. Average retail rents are projected to rise 1.4 percent in 2013 and 2.2 percent next year.
Ahmed Badat, a commercial REALTOR® with AMB Investment and Realty Resource of Lisle, sees some variance in retail stabilization. “Those retail centers that are anchored by national tenants held their own through the recession,” said Badat. “Those built right before 2008 on a speculative nature are still experiencing some vacant storefronts.”
One of the biggest upticks in the retail sector is in the expansion of niche grocery stores in Chicago and the suburban markets.
“I’m seeing future expansion of specialty grocery stores such as Mariano’s, Fresh Market, Fresh Thyme Farmer’s Market and Fresh Farms in the retail sector,” said Martis. “Smaller retail centers are leasing pretty well. Other older centers are repositioning where they are putting in fresh facades and improvements obvious to the public including landscaping and signage- oriented to attract tenants.”
Theresa Schulz, broker-owner of Schulz Properties of Downers Grove, is seeing franchise expansion growth in the retail sector with ‘hamburger concepts,’ Jersey Mike’s, Firehouse Subs, yogurt franchises and more fitness clubs. 7-Eleven also recently announced a major expansion of retail stores in North America.
“This year’s lease opportunities have been active by far more than previous years,” Schulz says. “I get most requests for 1,000-1,800 square foot size space range and don’t have enough product for that size range to accommodate the calls that come in. I’m working with owners to try to get them to split their space to offer smaller options,” She sees retail rates increasing and there is less available in prime locations.
“Investors are being creative to secure leases,” she says.
While 20 years ago you might not have seen a dental or CPA office as a storefront in a retail center, that is not true today. More retail centers are becoming more service driven with leases being captured by CPAs, dentists, physical therapists, chiropractors and other medical service providers.
Additionally, large big box stores are looking for ways to offer a boutique or smaller footprint into urban market areas. Office Max plans to open its first store of the future
, “Office Max Business Solutions Center’ in downtown Chicago Streeterville neighborhood by September of this year, catering to small business customers in its 3,900 square foot shop.
At the same time communities are eyeing opportunities to provide new incentives to developers.
“Tax Increment Finance dollars are being used for redevelopment of sites putting in infrastructure to draw retail to area where no development is right now,” said Martis. “Communities are going through county delinquent tax programs to file proceedings on properties to gain control of properties and use TIF monies to redevelop the site to draw in new retailers.”
Also national hotel chains are looking for opportunities for expansion into the Chicago suburban market. A new Embassy Suites
Conference Center is planned along the I-88 corridor near Naperville that will includes a 13,000 square foot banquet hall.
Commercial REALTORS® interviewed indicate the office market is softer in the suburbs than in downtown Chicago.
“There is still a high office vacancy rate in the suburban market waiting to be leased,” Schulz says.
Martis agrees and adds not a lot of new development is occurring in terms of office expansions in the suburban market.
“New major office construction is occurring more near O’Hare/Rosemont, Glenview and Northbrook areas,” Martis said. “But there is significant development in small medical centers and expansion of hospitals. Online universities are expanding leased office space in suburban areas.”
Industrial vacancy rates nationally are expected to slide from 9.4 percent in the second quarter of this year to 8.9 percent in the second quarter of 2014. Annual industrial rents are seen to rise 2.4 percent this year and 2.6 percent in 2014 according to NAR.
“Industrial complexes used to be built in hopes it would contain the right amenities to attract a tenant before the building was completed,” Martis adds. “Most of the 100,000 square foot industrial complexes are now “built to suit” instead of building industrial construction ‘on spec’.
Martis says that industrial vacancies are fairly close to what you see in office vacancies with typical properties selling faster rather than leasing. Continued growth is occurring in light industrial areas that fringe around residential areas.
“In Chicago, I’m seeing large multi-story buildings being repurposed and converted on the near west side of Chicago into storage facilities for the public,” said Martis. “These facilities have a climate controlled environment where individuals can store anything from wine to antiques. Many of them offer entry point to drive cars in and unload inside.”
The apartment rental market–multifamily housing–should see vacancy rates edge up to 4.1 percent in the second quarter of 2014 on a national level.
“We will see approximately 2,000 new apartment units coming on the market in Chicago within the next 12-24 months and in the suburbs about the same number,” says Martis.
Multifamily has been the strongest sector of the commercial market throughout the recession. “There has been continued demand for quality apartments,” said Martis. “In the meantime rents have continued to go up because of demand. This end of the market has been so favorable you don’t see a lot of owners letting loose of their portfolios in this area.”
Badat says while new construction of new multi-family units has been moderate, the demand was met pretty quickly. Rents have increased to meet supply and demand. “There has been a steady increase in rental increases in Chicago market,” Badat said.
Some commercial REALTORS® have investors waiting to purchase multi-family even before inventory is available.
“Multi-family is an easy entry-point for new investors wanting to venure into the commercial market,” Martis says. “Quite a few of the apartments are being managed by owners themselves.”
He also sees resurgence in assisted living and senior housing development after a slow-down in past couple of years. “On the commercial side, our soft spot was hitting about the same time as the residential market,” said Martis. “As the economy starts to come back you will see more companies starting to expand.”
NAR estimates average apartment rents are likely to increase 4.6 percent this year and another 4.6 percent in 2014.