CHICAGO—The Chicago retail market has shown a good deal of strength since 2015, but the growth of e-commerce continues to limit the amount of space taken by tenants. That was the finding of researchers from Newmark Grubb Knight Frank, who plan to release their Chicago Retail Equinox Report at the International Council of Shopping Centers conference in Las Vegas this week.

Both the downtown and suburban retail markets experienced positive absorption for a third consecutive quarter. As a result, overall vacancy declined 20 bps to 7.8%. Although the market got off to a slow start in 2015, since then absorption totaled over 3.6 million square feet. At 7.1%, the downtown's vacancy rate improved by 260 bps after 106,000 square feet of absorption. The suburbs posted 616,000 square feet of absorption, driving vacancy down 10 bps to 7.9%, the lowest rate since late 2008.

“Chicago retail is in a stable, solid position overall,” Jim Schutter, senior managing director of NGKF, tells GlobeSt.com. “We also have new development happening in infill areas that are underserved.”

However, amidst all the good news for Chicago retail, NGKF also points out that “it is clear that consumer shopping habits have changed with the advent of the internet and mobile devices.” In fact, the share of US e-commerce sales as a percent of total sales grew from 3.3% in early 2007 to 7.5% today, according to the report. “This paradigm shift creates contrasting effects on both retail and industrial markets.”

The Chicago region's in-store retailers had 5.7% employment growth in 2015, compared to 6.3% for non-store retail, NGKF finds. “This suggests that in-store retail operations are scaling back in response to slower in-store sales and non-store employers are hiring to meet the growing demand of this new sales channel.” Furthermore, the average retail lease size in Chicago has shrunk 39% since 2006.

Filling that gap is not easy, but Schutter says there are possibilities. Healthcare providers, for example, have in the past few years started to open up specialty centers across wider geographic areas and vacant retail space can sometimes serve very well. And “every time you turn around there is someone with a new food concept looking for space.” Still, the high turnover rate among restaurants makes that a challenge.

Meanwhile, the same e-commerce phenomenon has brought a lot of momentum to the industrial sector, especially for the warehouse and distribution properties needed by e-commerce retailers. As reported in GlobeSt.com, demand for these products is outpacing the total industrial absorption. And “as a percentage of total inventory, construction of warehouse and distribution facilities surpassed that of the total industrial market in each of the last five years,” NGKF says.

“With the arrival of e-commerce, the market entered a period of uncertainty and confusion,” the company concludes. “The demands of investors are now at odds with the needs of retailers who require more flexible space and leasing terms. This puts landlords in the difficult position of meeting investors' value expectations while accommodating occupiers. E-commerce is more than a passing trend and so, retailers and landlords will need to adjust to these new constraints to remain competitive in the near term.”

Instant Insights /

A Solid Chicago Retail Market Faces E-Commerce Challenge

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