11 Reasons To Love Chicago Retail
275 of you joined us yesterday, at Trump International Hotel & Tower, to hear Chicago retail icons and the industry’s next generation talk shop at Bisnow’s Chicago Retail Real Estate Summit. From their sage wisdom, based on years of enabling our shopping addictions, we’ve created this list of 11 reasons it’s a good time to invest in Chicago retail real estate.
Retail’s hot, just look at the north of 95% occupancy levels of most major REIT portfolios, says Pine Tree Commercial Realty principal Peter Borzak (whose first job was as a Holiday Inn busboy in Evanston). The retailers that are thriving are embracing an omni-channel strategy, and the need for fewer physical stores makes location more important than ever, he says. Pine Tree’s deals nationally range from stable to value-add to development, and the firm plans to sell six properties this year.
When asked about the threat/opportunity of e-commerce, Structured Development founding principal Mike Drew says if retailers are aware and proactive they will be successful. If not, they will fail. An example: Structured Development had a Borders-anchored center at North and Halsted, but the retailer was oblivious to the impact of e-commerce and disappeared. Structured generally prefers long-term holds, but it chose to subsequently sell Lincoln Park Centre due to debt considerations and re-tenanting costs, Mike says. The property was sold to Acadia for $31.5M in 2011. (Acadia re-leased the property and sold it to Georgetown several weeks ago for a whopping $64M.) Structured has changed the face of the North/Clybourn submarket project by project, and its biggest yet, $270M New City, is an example of today’s destination-oriented, entertainment-focused urban retail centers.
The third generation in a 74-year-old business, Abbell Associates CEO Liz Holland is proof that longevity is possible, even in fickle retail. It’s about executing a narrow strategy well, she says. (As a bankruptcy attorney she learned that companies don’t starve to death, they choke to death.) With today’s low interest rates, that means Abbell is focused on creating core product via acquisitions and development. Her market wish list: That impending tax reforms don’t get in the way of capital flows, and that Illinois follows Ohio’s lead with development incentives like brownfield remediation tax abatements.
Capri Retail Advisors CEO Ross Glickman (who started off as an advance man for the Humphrey campaign in ’72) is seeing a dearth of retail serving urban minority communities like African-Americans, Asians and Latinos. Capri found success revamping Baldwin Hills Crenshaw Plaza in LA, and it plans to perpetuate that model nationally in major metros. (Locally, it’s working on outlets in Country Club Hills with California-based Craig Realty Group.) Ross is interested to see what becomes of Jewel’s real estate and parking lot opportunities.
Newmark Grubb Knight Frank senior managing director Jim Schutter recently filled a vacant MyGofer/Kmart location (a former Sears’ concept) in Joliet, owned by Intercontinental Properties and managed by M&J Wilkow, with both a Sports Authority and a Fresh Thyme Farmers Market. As a former paperboy (with 133 people on his daily route), Jim knows how to motivate people to walk out their front door, and these days he’s seeing an interest in health and entertainment retail uses (though gyms often come with credit questions), along with items you’d never order online (like mattresses).
First Western Properties president Paul Tsakiris did three EB-5 deals last year (read our EB-5 primer here), and he’s noticed that the motivation behind those deals isn’t necessarily real estate, it’s a path to citizenship. And those buyers aren’t messing around. Paul sold some Streeterville retail to an EB-5 buyer in nine days, at $100/SF over its value, he says. While the craze can lead to these artificially high prices, that means some significant windfall opportunities. (Fun fact: An EB-5 buyer came in second on the Old Post Office sale in ’09 and drove the price to $40M.)
Pircher, Nichols & Meeks partner Dave Pezza moderated our panels and surveyed panelists on retail’s future. The general consensus: Short-term interest rates will stay stable, long-term rates will go up, cap rates will generally be stable, property prices could creep up and access to capital is better than ever. Panelists predictions for the next downturn ranged from two to 10 years down the line (with most predicting three to five more favorable years ahead). They agreed we’ll see no meaningful inflation in the next couple of years, migration to urban centers will continue and e-commerce will have an overall positive impact.
Next Realty has shifted its focus to “value-keep” cash-flowing opportunities, says managing director Eteri Zaslavsky (snapped with Bisnow's own Jonathan Hobfoll). Take the Heinen’s-anchored shopping center in Barrington that the firm just bought from Hamilton Partners. With the right financing (in this case a 10-year CMBS loan with five years IO and a 4.1% interest rate), Next plans to double its investors’ equity over the next seven to 10 years, she says. As CEO Andy Hochberg likes to say, it’s about “Location, Liquidity and Luck.”
JLL VP and agency leasing lead Peter Caruso, just back from a Mexico vacation, says fitness and grocery may be hot, but healthcare is the new face of retail. Users like ATI, Athletico and hospital systems are taking increasing amounts of retail space (and willing to go off the corner) in long-term deals with aggressive rents (which justify their heavy build-outs). Rents are less a reflection of the market at large, and more directly connected to a tenant’s potential annual sales in that particular location (no matter how strong the real estate), Peter says.
Revision Group co-founder Scott Goldman feels blessed to have experienced a downturn early on, since it taught him how quickly the world can evaporate. Four-year-old Revision focuses on both quick value creation like single-tenant development and long-term yield plays (like Barry Plaza on Pulaski), but avoids the trading side of the business where a glut of capital has driven away all entrepreneurial profit. A sign of the times: Revision just sold an Evanston Starbucks to a Chinese national at a 5.1% cap rate, and six of the 12 offers were Chinese investors looking for a safe haven for capital.
Shiner Capital Partners got its start 30 years ago building food and drug-anchored centers around Chicago, but principal Phil Slovitt tells us it's pivoted into acquisitions given today’s development margins. Shiner likes both value-add and cash-flowing assets it can buy below replacement cost with long-term financing, and it’s branched into out-of-state markets like the Triangle in North Carolina (Raleigh-Durham-Chapel Hill MSA) and the Twin Cities. Online retailers themselves have ironically proven the top-line value of brick and mortar, he says. Apple is generating an unprecedented $4,500/SF in sales, while Bonobos can make 4X more revenue per customer if it gets them in the stores.
