Spring Summer 23 Retail Space Guide

BURKE MILL VILLAGE WINSTON-SALEM, NC

HUFFMAN-MILL COMMONS BURLINGTON, NC

PHARR TOWN CENTER PHARR, TX

A BIT OF POSITIVITY? JLL REPORT DISPELS SOME OF THE GLOOM AROUND COMMERCIAL REAL ESTATE In its Mergers & Acquisitions and Strategic Transactions Monitor report released in early April, JLL’s researchers found plenty of optimism in the commercial real estate market.

HOW STRONG IS DEMAND FOR MOB SPACE? JUST LOOK AT HOW MANY MEDICAL OFFICES ARE OPENING IN VACANT RETAIL STOREFRONTS Demand for medical office space remains high throughout the Midwest. And there are few signs that this demand will lessen any time soon,

WELCOME NEWS FOR RETAIL IN 2023, BASED ON ANNUAL FORECAST BY THE NATIONAL RETAIL FEDERATION The National Retail Federation released its annual forecast in March, and the bottom line? Things are looking up for the sector, and market experts are optimistic.

LOOKING BACK AND AHEAD AT THE RETAIL PROPERTY INVESTMENT SALES MARKET

As we look back at 2022, it provides a useful case study of how quickly real estate markets can cycle.

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THE BOULDER GROUP NETLEASE MARKET REPORT

SPRING/SUMMER METRO CHICAGO RETAIL SPACE GUIDE

The Metro-Chicago Retail Space Guide is published twice a year by the Real Estate Publishing Corporation, 1010 Lake St Suite 210, Oak Park, IL 60301 • 708.622.0074 • www.rejournals.com

Publisher: Mark Menzies • menzies@rejournals.com

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A bit of positivity? JLL report dispels some of the gloom around commercial real estate

By Dan Rafter, Editor

Optimism? That’s in short supply today in the commercial real estate industry.

This isn’t surprising: Interest rates remain high, something that has throttled investment sales. Buyers and sellers can’t agree on the sales prices of industrial, multifamily and retail properties. And recent bank failures are bringing even more uncertainty to an industry that craves stability.

But in its Mergers & Acquisitions and Strategic Transactions Monitor report released in early April, JLL’s researchers found plenty of optimism in the commercial real estate market. As the report says, inflation might have peaked, the Fed has indicated it is nearing the end of its interest-rate hikes and institutional capital sources have amassed a war chest of more than $240 billion, money they are itching to spend.

Chicago Retail Space Guide recently spoke with Sheheryar Hafeez, managing director with JLL Capital Markets, about the company’s latest report and the state of the capital markets. His overall message? Yes, these are challenging times. But there are reasons to be optimistic, too.

Let’s start with the biggest news. How have the recent bank failures effected the commercial real estate industry?

Sheheryar Hafeez: It really is a week-by-week determination these days for where the market psyche happens to be. One week it feels like the sky is falling. The next, we are off to the races and on top of the world. After all the noise about the volatility of the market and the bank failures, we have basically been flat across pretty much every sector except maybe office.

It’s interesting: Despite the headlines about the bank failures and interest rates, the market has somewhat absorbed that information. I think the market saw that the Federal Reserve Board was constructive and moved aggressively to curtail any contagion effect from the bank failures we’ve seen. That was well-received. When I spoke with people I knew in the venture capital

or tech world, they told me that the Friday night when Silicon Valley Bank failed was one of the most nerve-wracking nights since the 2008 recession. But the government moved fast to limit the damage. That eased some of those fears.

There are still concerns about future bank failures, though?

Hafeez: We don’t have a crystal ball. We don’t know when the next shoe will fall. The Fed seems to be constructive in dealing with this, though. And the damage seems to be specific to certain banks. The banks that operate in a more

conservative environment since the last financial crisis seem to be safe.

I like to be careful when speaking about these matters because you never know what will happen. But we haven’t seen a chain of failures yet. And the important point is that if we are going to see more failures, it seems like the Federal Reserve is prepared to not let it become a major issue if it can reasonably curtail it.

How about interest rates and inflation? Is there good news on that front, too?

“Despite the headlines about the bank failures and interest rates, the market has somewhat absorbed that information.”

Hafeez: It seems that inflation might have peaked and it also appears that the Fed might be nearing the end of its interest rate hikes. The Fed raised its benchmark rate by a smaller 25 basis points last time partly because the data led it to say that the economy might be cooling off a bit. The Fed recognized that it might not have to be as aggressive with rate hikes now.

The aggressive interest rate increases were going to have some repercussions. The banks that were overleveraged and took more risks paid the brunt of it.

What commercial sectors today are attracting the most attention from investors?

Hafeez: The sectors that are performing well today are the same ones that were performing well before interest rates started to rise. Self-storage is very strong. Data centers are attracting a lot of attention. Net lease is flat for the year but is still a solid investment. The same sectors that were outperforming before the Fed started hiking its rate are still the ones that investors favor.

The net lease sector is interesting because it encompasses so many asset types. These assets usually feature longer-term leases, 10 years or more on average. They might not generate big profits, but they are steady-Eddie investments. They are safer investments.

But investors aren’t only focusing on the safest of investments. Some are investing in riskier assets.

What riskier asset types are investors targeting today?

Hafeez: The one asset class that jumps out is retail. You’d expect investors to target industrial and healthcare. Those are strong sectors. But retail has seen a lot of recovery since the early days of the pandemic. Retail was off the radar for investors but is now starting to come back. The retail sector went through a lot of volatility and restructuring. But retailers have come out of this period stronger. There are a lot of healthy retailers now. There are a lot of retail landlords with strong portfolios. They have produced compelling same-store return-on-investment growth and are getting rewarded for that. Because of that, retail assets are attracting the attention of REITs and other investors. That was a sector that I wouldn’t have thought investors were targeting so much before I looked at the data.

What about the office sector? Are you seeing any positive signs there?

Hafeez: Office is going through the same type of life cycle now that retail has already gone through. Over time, the office picture will become clearer. Office will remain an important commercial class. People won’t stop going to the office. It will remain an important part of the real estate sector. There is just so much uncertainty now. We don’t know where we are headed. It will take more time before the story clears up a bit.

REITs have owned some of the best office spaces over the years. They have acquired and developed some of the best and most competitive product in the office space. They might be getting hit now by the volatility of this sector. Hopefully, this is temporary.

The JLL report lists some reasons why investors should have optimism about the commercial real estate market. Can you talk about some of those?

Hafeez: For one thing, inflation might have peaked. Hopefully, that will start to go down. But another reason is that REITs have been effective at getting rents above the rate of inflation. They have become more sophisticated. They have better assets and are using better technology to work those assets. That shows up in the same-store net operating income growth. Investors can typically beat inflation with the growth in net operating income.

Then there is the liquidity out there. There is a lot of liquidity for asset allocations sitting on the sidelines. There will be a push to get that money out as the economy starts to settle down.

As humans, we often think that where we are today is where we are going to be forever. We all do that. In the middle of COVID, we all thought that no one would be going back to work in an office, that cities will be dead, that everyone will be moving to the suburbs and that we’ll be wearing masks forever. Now, two or three years later, we are in a very different place. We even had some record years when it comes to transaction activity. So a lot of us might think that we are always going to be dealing with today’s uncertainty and higher rates. But we won’t be. Things will stabilize and deals will get done again. The human psyche can change dramatically.

“Retail was off the radar for investors but is now starting to come back. The retail sector went through a lot of volatility and restructuring. But retailers have come out of this period stronger.”

How strong is demand for MOB space? Just look at how many medical offices are opening in vacant retail storefronts

By Dan Rafter, Editor

Demand for medical office space remains high throughout the Midwest. And there are few signs that this demand will lessen any time soon, especially as the country’s population ages and a growing number of patients seek medical care outside of hospital campuses.

Demand is so high, in fact, that many healthcare providers are filling vacant spaces that were formerly home to retailers. This is a growing trend: Retail locations offer the benefits of visible signage, locations off of major roads and plenty of parking. All of those benefits are attractive to physician groups looking for new space.

Finding vacant space might become even more of a challenge for healthcare providers,

and why empty retail space might be a more important factor for these providers.

According to the latest research from Colliers, the uncertainty surrounding interest rates combined with supply chain bottlenecks are combining to put many new medical office building projects on hold until the second half of 2023.

At the same time, medical providers are struggling to find enough healthcare workers to staff new facilities. That is also putting expansion plans on hold for many.

Even with these challenges, though, the medical office market remains a robust one, according to Louis Suarez, senior vice president

for Colliers Minneapolis and an expert in the medical office building sector.

“There is still strong interest in healthcare investment sales,” Suarez said. “Healthcare, along with industrial, remains the most stable of all the sub types and some of the strongest sectors historically. That is continuing.”

Thanks to higher interest rates, though, the number of healthcare investment sales will slow this year, despite this steady demand, Suarez said.

Larger REITS are putting transactions on hold or are no longer as aggressive as they’ve been historically, Suarez said. At the same time, not as many owners of medical office buildings are

putting their properties on the market. This limits the number of medical office properties that are available for investors to purchase even.

“We are seeing a difference in expectations on what sellers thought their buildings were worth and what investors are willing to pay,” Suarez said. “I do think there is some of that delta between the expectations of buyers and sellers. That is slowing the pace of sales.”

When buyers were seeking medical office space last year, they were often looking for core-plus assets, larger properties that are filled with high-quality tenants on long-term leases or properties on a hospital campus.

There are individual private investors, though, including many 1031 investors, who are looking for smaller medical office properties that might not be located on or near a hospital campus. And in good news for these investors, there are more of these medical offices opening across the Midwest.

That’s because many patients today are receiving medical care, even surgeries, in outpatient facilities. Patients like the convenience of these medical spaces that are often located in retail strip centers. And because demand for these outpatient centers is on the rise, developers are building more of them while owners are more likely to accept switching a vacant office or retail space into one filled by a healthcare provider.

“There will always be clinics and smaller properties that will be available,” Suarez said. “Typically, they are not of the scale or size that larger institutional investors are willing

or want to look at, the 10,000-square-foot to 20,000-square-foot buildings with one to three tenants. These might be attractive to a local or regional investor or a 1031 investor versus a 150,000-square-foot or 200,000-square-foot property that has more infrastructure and higher costs.”

But the challenge for smaller and larger investors remains the same: There just aren’t that many medical office properties for sale now.

“The people who own these properties are typically long-term holds,” Suarez said. “If they sell on the larger side, it is usually one REIT selling to another REIT or changing up a portion of their portfolio or adding to it.”

Waiting for certainty

What will inspire owners to put more medical office space on the market? And what will inspire buyers to return to the market to purchase these properties?

Suarez says that it comes down to certainty: Investors and owners are waiting to see some certainty when it comes to interest rates.

“People want clarity on what the new normal will be from an interest rate perspective,” Suarez said. “It might still take some time to get the buyers and sellers on the same page when it comes to the valuation of medical properties.”

Then there are labor issues, specifically on the medical providers’ side. Suarez said that medical groups aren’t as willing to expand today because so many of them are struggling to find enough healthcare workers.

They can’t open their new offices, treatment centers or ambulatory care centers because they can’t find enough workers to staff these new facilities. That, Suarez says, has slowed the amount of new medical office space and healthcare facilities that are opening.

One trend that is boosting the amount of healthcare space, though, is the conversion of empty office and retail space into medical uses. Suarez said that this trend will continue, but did say that the space being converted has to meet certain requirements to work for healthcare use.

“You can’t put a neurologist next to a nail salon,” he said. “The space has to be well-positioned. There might not be enough windows. The parking might not work. You might run into infrastructure issues. A building might not have the right HVAC, electrical system, plumbing or weight load. If you try to put an MRI machine on the second floor of an office building and it’s not designed for that, you could face challenges.”

Then there is the equipment that developers and healthcare providers need in their spaces. They might need to upgrade their electrical systems. Getting the switch gear necessary for that could take up to a year today. This, too, is holding back both new medical office projects and conversions.

“The conversions are certainly happening today,” Suarez said. “But you can’t convert any space. It has to be the right space.”

“People want clarity on what the new normal will be from an interest rate perspective. It might still take some time to get the buyers and sellers on the same page when it comes to the valuation of medical properties.”

OPPORTUNIT Y AWAITS IN HOFFMAN ESTATES .

Across industries, Hoffman Estates, con�nues to a�ract a diverse mix of developers and businesses who want to invest in the Village. That’s largely thanks to a strong workforce pipeline, proximity to transporta�on hubs, a diverse popula�on with strong income demographics, and more, all adding up to a high quality of life in a pro-business community.

Contact the Village’s Economic Development team at 847-781-2662 to learn about exci�ng projects and reinven�ons happening around town and how your business can be part of a public-private partnership with the Village of Hoffman Estates.

9 REASONS WHY BUSINESSES CHOOSE HOFFMAN ESTATES:

Welcome news for retail in 2023, based on annual forecast by the National Retail Federation

The National Retail Federation released its annual forecast in March, and the bottom line? Things are looking up for the sector, and market experts are optimistic.

During this year’s State of Retail & the Consumer virtual conversation, which streamed discussions on the health of consumers and the retail industry in the U.S., retail executives from major brands, economists and consumer experts unveiled NRF’s yearly sales forecast.

First and foremost, NRF predicted that retail sales will grow between 4% and 6% in 2023, with retail sales reaching between $5.13 trillion and $5.23 trillion this year.

The 2023 figure compares with 7% annual growth to $4.9 trillion in 2022. The 2023 forecast is above the pre-pandemic, average annual retail sales growth rate of 3.6%, according to NRF’s press release detailing the event.

“In just the last three years, the retail industry has experienced growth that would normally take almost a decade by pre-pandemic standards,” NRF President and CEO Matthew Shay said. “While we expect growth to moderate in the year ahead, it will remain positive as retail sales stabilize to more historical levels. Retailers are prepared to serve consumers in the current economic environment by offering a range of products at affordable prices with great shopping experiences.”

Non-store and online sales, which are included in the total figure, are expected to grow between 10% and 12% year over year to a range of $1.41 trillion to $1.43 trillion, based on the press release, but it’s nowhere near over for the brickand-mortar experience.

Although online shopping is still popular among consumers, a significant portion of its growth is attributed to multichannel sales, which incorporates physical stores in the fulfillment process. As the role of brick-and-mortar stores has evolved in recent years, NRF said they remain the foremost point of purchase for consumers, comprising approximately 70% of all retail sales.

NRF projects full-year growth of around 1%, reflecting a slower economic pace and half of the 2.1% increase from 2022. Inflation is on the way down, based on the release, but will remain between 3% and 3.5% for all goods and services for the year.

As for the labor market, it’s remained resilient, but the trade organization anticipates job growth to decelerate in the near future as a result of slower economic activity and the prospect of restrictive credit conditions. NRF has predicted the unemployment rate will exceed 4% before next year.

NRF Chief Economist Jack Kleinhenz also noted at the webinar that aggregate economic activity has held up well, despite restrictive monetary policy that is working to curb inflation. He also acknowledged that recent developments in the financial markets and banking sector, as well as some unresolved public policy issues, complicate the outlook.

“It’s still too early to know the full effects of the banking industry turmoil, but consumer spending is looking quite good for Q1 2023,” Kleinhenz said. “While we expect consumers to maintain spending, a softer and likely uneven pace is projected for the balance of the year.”

NRF’s calculation of retail sales excludes automobile dealers, gasoline stations and restaurants to focus on core retail.

Looking back and ahead at the retail property investment sales market

By Joe Girardi, Mid-America Real Estate

As we look back at 2022, it provides a useful case study of how quickly real estate markets can cycle. The year started with historically low interest rates, an abundance of capital—both equity and debt—record-breaking prices and one of the most robust transaction environments in the last 15 years. Then, ultimately, it transitioned to a much slower deal market with borrowing costs effectively doubling and cap rates increasing by 150–200 basis points.

To identify the overall transaction market of shopping centers, one might look at Mid-America’s Investment Sales Group in Chicago, as historically, its transaction volume has mirrored that of the national landscape. Over the last 10 years, the group has sold about 30-35 shopping centers per year with an average transaction volume of $700 million annually.

As we look back at 2022, Mid-America sold 50 shopping centers totaling over $850 million, indicating an above-average year for transactions, with around 75% of that volume completed in the 1H2022.

Looking toward the second half of 2023, we are encouraged by some green shoots that are emerging in the transaction market. Lenders are slowly coming back into the market and will need to hit fresh allocation goals for the year. Interest rates seem to be stabilizing, which will remove much of the uncertainty around the valuation question enabling buyers to get active again. And

perhaps most important is that brick-and-mortar retail has proven its importance in the consumer acquisition ecosystem, and investors have recognized this.

2022 Highlights

In Q1, Mid-America sold Edens Plaza in the heart of Chicago’s North Shore for $110 million on behalf of Newport Capital Partners to Boston firm WS Development, who is in the process of repositioning the center and bringing online retailer Wayfair’s first flagship brick-and-mortar store to the property.

As we worked on that transaction with WS Development, we identified another opportunity for them to acquire the nearby historic Plaza Del Lago for $59 million in an off-market transaction from Kite Realty. WS Development will be reimagining that center into a true luxury lifestyle property with new tenants who you would traditionally only see in Chicago’s Gold Coast neighborhood along Oak Street or Rush Street.

In April, Mid-America also represented the Hornstein family in the legacy sale of two trophy shopping centers that they had owned for many years to public-REIT Brixmor for $135 million. These two assets (Elmhurst Commons and North Riverside Plaza) were both grocery-anchored centers that totaled over 725,000 square feet and featured tenants including Whole Foods, Amazon Fresh, Kohl’s, Best Buy, Burlington and Petco.

We also assisted longtime client IRC Retail Centers/DRA Advisors in the sale of four shopping centers around Chicagoland (all managed by Pine Tree) to four unique buyers throughout 2H2022.

Many of these sales were transacted at extremely aggressive pricing reflecting a need to consistently find the “needle-in-the-haystack” buyer when the market demands it.

Overall, 2022 was an interesting year for the commercial real estate market, and we look forward to what the rest of 2023 will bring.

Joe Girardi

Edens Plaza

Elmhurst Crossing

MARKET OVERVIEW

Cap rates in the single tenant net lease sector increased for the fourth consecutive quarter within all three sectors in Q1 2023. Single tenant cap rates increased to 6.05% (+10 bps) for retail, 7.00% (+5 bps) for office and 6.77% (+12 bps) for industrial in Q1 2023. Cap rates in Q1 2023 represented the highest levels since Q3 2020 for both the single tenant retail and office sectors. A decrease in transaction volume for the greater real estate market continues to limit 1031 exchange buyers transitioning into net lease properties. Transaction volume in 2022 lagged 2021 and experienced more than a 25% decrease for the net lease sector.

After years of historically low cap rates for all three asset classes, interest rates put increased pressure on cap rates. Financing costs currently create greater negative leverage situations for most net lease assets than typical in recent years. Until the spread between borrowing costs and cap rates decrease, transaction volume will continue to be impacted. When compared to Q4 2022, the overall supply of net lease properties decreased by more than 6%. The decline in property supply is largely attributed to less motivated sellers removing their properties from the market.

With economic uncertainty looming, investors are targeting resilient tenants with long term leases. Accordingly, new construction properties with recession proof tenants including 7-Eleven and McDonald’s represent some of the lowest cap rates in the sector. However, these tenants are not immune to upward cap rate pressure. In Q1 2023, cap rates for new construction 7-Eleven and McDonald’s properties increased by 35 and 15 basis points respectively. Furthermore, the spread between asking and closed cap rate increased for all three asset classes. The spread rose to 30 basis points for retail, 40 for office and 27 for industrial.

Investors will continue to follow the Federal Reserve’s monetary policy. Investors largely believe there will be an end to the larger rate increases, of 50 basis points or more, in the near future. Transactions will be driven by low leverage or all cash 1031 buyers for the highest quality product. However, given the overall uncertainty in the broader real estate market, the depth of the 1031 buyer pool will be limited when compared to historical standards. Sellers with a level of motivation (i.e. debt maturity, backfilled development pipeline, etc.) will continue to move pricing to attract buyers that can offer high certainty of execution.

2022 Q1 2023 Basis Point Sector (Previous) (Current) Change

SELECTED SINGLE TENANT SALES COMPARABLES

NET LEASE CAP RATE TRENDS

MEDIAN ASKING CAP RATES BY YEAR BUILT

FOR MORE INFORMATION

AUTHOR

John Feeney Senior Vice President

john@bouldergroup.com

CONTRIBUTORS

Randy Blankstein President randy@bouldergroup.com

Carter Himley Senior Analyst

carter@bouldergroup.com

Jimmy Goodman Partner

jimmy@bouldergroup.com

Sean Dittoe Analyst

sean@bouldergroup.com

© 2023. The Boulder Group. Information herein has been obtained from databases owned and maintained by The Boulder Group as well as third party sources. We have not verified the information and we make no guarantee, warranty or representation about it. This information is provided for general illustrative purposes and not for any specific recommendation or purpose nor under any circumstances shall any of the above information be deemed legal advice or counsel. Reliance on this information is at the risk of the reader and The Boulder Group expressly disclaims any liability arising from the use of such information. This information is designed exclusively for use by The Boulder Group clients and cannot be reproduced, retransmitted or distributed without the express written consent of The Boulder Group.

River Pointe of Algonquin Phase I

River Pointe

Algonquin Phase II

Bloomingdale

Charles

McHenry

David

David

Tenants: Ace Hardware, Planet Fitness, Dollar Tree, Sherwin Williams

David

Reach Over 8000 Professionals

PRIME RETAIL SPACE AVAILABLE

COUNTRY CORNERS CRYSTAL LAKE

This 123,600 sq. ft. center is anchored by Petco, Dollar Tree, LaRosita Fresh Market and Savers located in the heart of retail corridor of the rapidly growing community of Crystal Lake.

Established in 1985, Highland Management Associates, Inc. is proud of the high-quality, prime locations, and high-occupancy level of the thirteen properties it developed, owns and manages in Cook, DuPage, Kane, and McHenry Counties.

PALATINE PLAZA PALATINE

The central location and visibility of this 137,187 sq. ft. shopping center appeals to Tenants, including: Ace Hardware, Pete & Mac’s Pet Resort, Dollar Tree, Sherwin Williams, Dairy Queen, Brown’s Chicken and Elderwerks.

CHARLES PLAZA HOFFMAN ESTATES

Located on Palatine Road join Starbucks, Jewel Osco, Lou Malnati’s, ATI Physical Therapy, and Orangetheory Fitness in the premier community of Hoffman Estates. High visibility for both local and commuter traffic.

STONY CREEK SOUTH ELGIN

Anchored by Jewel/Osco and Ace Hardware, at the intersection of Randall Road and McDonald Road in the fast-growing suburb of South Elgin. Nearby Retailers Kohl’s, Best Buy and Home Depot.