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The absorption of several former Dominick’s supermarkets buoyed retail leasing in Chicagoland during the first quarter, according to Newmark Grubb Knight Frank’s quarterly Chicago Retail Equinox research report. Retail investment sales also saw a boost during the first three months of the year stemming largely from institutional investors and private equity funds.
Both the Downtown and suburban markets contributed to overall performance, recording over 1.7 million square feet of positive net absorption in the first quarter, nearly twice the amount recorded in the same period in 2013. Overall vacancy fell by 30 basis points to 9.1% from the previous quarter, but is higher than the 8.6% vacancy rate a year ago. This is largely due to the 30 remaining unoccupied supermarket locations throughout the market.
Downtown Chicago posted its second straight quarter of positive net absorption as tenants absorbed 36,000 net square feet. Michigan Avenue and River North saw limited closures, which are usually typical in the first quarter. The offering at 300 North Michigan Avenue, which is slotted for redevelopment upon Walgreens’ departure, added 75,000 square feet of vacant retail space to the market and pushed up the downtown vacancy rate by 10 basis points to 9.2%.
“Downtown Chicago maintained last year’s leasing momentum, resulting in higher rents and fewer available prime spaces,” said Greg Kirsch, executive managing director. “The Luxury District maintained strong occupancy after an explosive second half of 2013 and retailers are recognizing more opportunity in the central business district with multiple hotel conversion projects in the works.”
In the suburbs, both the small shop and big box sectors contributed the majority of the region’s first-quarter positive net absorption. The suburban vacancy rate declined 30 basis points from fourth quarter 2013 to 9.1% in the first quarter 2014, but remains higher than 8.6% a year ago. This decline was aided by 16 of the 72 former Dominick’s locations finding tenants or buyers.
“The story of the suburbs largely centers on the fate of the remaining unoccupied Dominick stores, most of which are in the suburbs,” said Jim Schutter, senior managing director. “These locations were obviously not the first pickings, but could be repositioned for the right tenant or by the right owner.”
On the investment side, Chicago area retail property sales volume in the first quarter totaled $656.6 million, up 25 percent from $526 million the previous year. The largest sale in the quarter was Melohn Properties Inc.’s $40.5 million purchase of 1615 South Clark Street, a standalone retail property leased to Mariano’s Fresh Market, one of several grocery chains fighting for market share in Dominick’s absence.
“A number of institutional investors and equity funds accumulated grocery-anchored strip centers and big-box assets in the first quarter, bolstering sales volume,” said Michael Dillon, executive managing director. “This is causing prices to rise, and core assets are achieving in-place cap rates below 5.5% in some instances. Sustained low interest rates are expected to keep cap rates low and volume levels rising.”
The report predicts that long-standing vacancies such as the remaining Dominick’s locations, along with growing competition from e-commerce and robust local M&A activity by Land’s End, Men’s Wearhouse and Eddie Bauer, will keep overall vacancy higher than desired heading into the spring shopping season. Still, micro-markets with growing populations and increasing disposable income, such as Bucktown, the Luxury District and the Clybourn Corridor, will see steady demand and strengthening market fundamentals.
To speak with one of the company’s local market experts, please contact Mira Matic at mira@miramaticpr.com.
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