As interest rates rise, commercial financing enters a new phase

Susan Blumberg

Susan Blumberg

by Dan Rafter

No one knows yet just what kind of president Donald Trump will be. But one immediate result of his election was a quick rise in interest rates. And that has already brought a change to way developers and investors are borrowing money to fund their commercial real estate developments and acquisitions.

Illinois Real Estate Journal recently spoke with a pair of Chicago-area commercial finance pros

– Sue Blumberg, senior vice president and managing director in the Chicago office of NorthMarq Capital, and John Petrovski, managing director and head of U.S. commercial real estate lending with the Chicago office of BMO Harris Bank – about the steps that developers and investors are taking today to secure the financing for their projects.

John Petrovski

John Petrovski

Illinois Real Estate Journal: The presidential election is finally over. Have the results brought any – or will they bring any – changes to the commercial lending market in Chicago?
Sue Blumberg: The lending market has shifted a bit with the recent increase in interest rates. We are seeing a shift toward long-term planning versus short-term planning from borrowers. Even for properties that are in transition – they are being leased, under construction or in the planning stages – the rise of interest rates could affect them going forward. The plans of the developers and investors could change a bit depending on what happens with rates. That being said, those borrowers, those developers and investors who are familiar with real estate and who are long-term players, have been through cycles of higher interest rates before. They tend to be prepared for these kind of changes. There is no reason for concern on their part. There’s just more of a need for longer-term planning when rates go up.
John Petrovski: We’re moderately optimistic for 2017. We think that the U.S. economy will continue in the slow-growth mode. That’s a positive for commercial real estate. There are a few clouds on the horizon. We don’t yet know what the president-elect will mean for business and growth. That is unknown at this point.

IREJ: Were you surprised that interest rates after the election finally rose?
Blumberg: Not really. The way I see it, the rates didn’t rise solely because of the election. People expect there to be actual growth in the future. There has been actual growth in the economy. There has been growth in employment, wages and GDP. It feels like the Fed finally signaling a rise in interest rates is a good thing for the country. It is actually stabilizing. I think rates would have risen even without what happened in the election. It was time for a rise, and that should be thought of as a good thing.
Petrovski: We’re waiting to see what happens with interest rates in the long-term. Does the Fed see more inflation so that rates will rise faster? That has added a bit of uncertainty to real estate projects. So there are some clouds because of the uncertainty. Now, those clouds could become soft, puffy white clouds if everything turns out to be good. Or they could turn out to be grey storm clouds. We’re not sure yet.

IREJ: How much uncertainty do we face in the commercial real estate market today because of the election?
Petrovski: Every election is unique. Eight years ago, the stock market hit its nadir. Lehman had failed. Back then, we were in a dark time. Obama’s vision of hope and change resonated with people. It was a much harder time to get a real estate loan than it is today. The capital markets had frozen, had shut down. Today we are operating in a much different environment. Clinton was perceived more as the status quo, a way to continue down the same path. The Electoral College results, though, said that the country was ready for a different path. Trump presents more unknowns. He says he’s pro-business, but what does that mean?

IREJ: It might be a tough adjustment, though. I think people have gotten spoiled by these low rates.
Blumberg: Spoiled is right. It will take a bit of a lag time for everyone to swallow the rate increases. But, really, a 4.5 percent interest rate is really good. Deals should work at those rates.

IREJ: What do you look at today when borrowers are coming to you and asking for commercial financing?
Blumberg: Liquidity would be the first thing. Experience is number two. Has that borrower or the key principals been through a cycle before? How did they perform? Were they able to stabilize their projects or make things right when a down cycle hit? Chances are that everyone who comes to us has had a hiccup in their past. It’s how they acted during the hiccup that matters. Most lenders agree that if you did everything you could, acted honestly and forthright, that’s a good sign.
Petrovski: I’m fond of telling our younger bankers that it all starts with the client, their experience, their reputation, the strength of their balance sheet. People who have done 50 real estate developments learn something on every one that they do. They bring all that experience to managing costs, to managing the construction schedule. People trying for the second time? The risks are higher. There is a higher risk of the project going sideways. With us, it all starts with the clients and their experience.

IREJ: What kind of changes are you seeing today in the number and type of financing requests coming your way?
Blumberg: I think construction lending might be curtailed somewhat. It won’t be shut off, by any means. But there will need to be more equity going into the deals that we approve. We generally do business with borrowers who have liquidity and funds and can spot it in times of a trickle or a hiccup. We want to make sure our borrowers have enough skin in the game.
Petrovski: Banks in general have pulled back on their appetite for construction financing. It’s still there. You can still get a construction loan. But they are being offered on more conservative terms today. We are still getting requests for construction loans. We are still quoting acquisition loans. Our loan-to-cost ratio is down a notch from 18 months ago as we get more conservative.

IREJ: When looking at the projects themselves, what do you consider before approving a financing request?
Blumberg: The quality of the leases in a project really matter. When you’re looking at office projects, say, you look at whether the tenants in that office building have expanded, contracted or been there for a long time. For industrial, location is everything. Absolutely, location is key. For retail, we look at a bit of everything. Amazon has certainly changed that world. We are looking at retail centers today that are offering more of a lifestyle customer experience in the store. That has been an exciting change. We like to work with retail clients who are attracting a lot of customers who want to come to their shops for an experience. That’s how they are competing with online sales.

When it comes to a start-up or an entrepreneurial spinoff of large firms, we’ll look closely and carefully at the people behind it. What was their role in their former employ? Who is backing their new venture? What is their commitment to staying in business? The first-time deal for anyone is the hardest deal. We are still seeing a terrific flow and advancement of the entrepreneurial spirit today.
Petrovski: When it comes to the actual deal, it’s all about whether it’s a quality development that looks like it’s built to resonate with the current market. For apartments, are the units well-designed? How many closets does it have? What is the layout of the kitchens, the ceiling heights? The experienced developers know what resonates in their markets. We look for something we think will sell well in that market.

IREJ: What about the multifamily market? It still generates plenty of headlines for how strong it is. What do you look at when considering financing associated with multifamily properties?
Blumberg: Right now, it is all about looking at the historical operations of a building over the last several years. On an existing property with a good track record, it’s much easier to get financing. A solid asset can be trended and researched. Those properties that are in lease-up, it goes back to feasibility and absorption.

IREJ: I know it’s difficult to predict the future, but what do you see in the next several months when it comes to the strength of the commercial real estate market?
Petrovski: Let me tell you, every developer predicts the future. They are always doing the best they can to predict what is going to happen in their markets. We look at what they’re predicting. Do we agree? Some developments have a lot of profit cushions built into them. Others are priced to perfection. They have aggressive rents and they have to hit them. They can’t afford any cost overruns. In some respects, the deal talks to you. If the deal is too tight, maybe that deal shouldn’t be done.

Overall, though, the level of commercial activity has been robust. I don’t see it increasing. If anything, the level of activity will remain at a constant level or we’ll see it dialed back a notch. Fewer projects might start. There is some concern with the overbuilding of Class-A apartments with higher rents. Some developers might take on fewer projects as they grow worried about there being too much supply out there. That is the debate that is taking place not only in Chicago but in every urban market. What is the pace of job growth? What is the pace of new supply? Are they in synch?

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The rent squeeze: Are new-construction apartment rents pushing too many renters away?

lumberyard-omaha

by Dan Rafter

It’s no secret that newly built apartments in urban areas are commanding high rents. But newly released numbers from MPF Research show just how costly new construction apartment units are compared to older, less desirable stock.

According to the firm, the most expensive Class-A apartment units — mostly located in newer buildings in the center of urban areas — rent for $1,663 a month on average in the country’s 100 largest metro areas. That is double the average monthly rents for lower-priced Class-C apartment properties.

In the Midwest, this rent stratification is seen most clearly in Chicago. MPF Research says that the average Class-A apartment in the city — again, made up largely of units in newer buildings in Chicago’s urban areas — rents for $2,170 a month. The average Class-C apartment unit, usually older stock located in less desirable or trendy neighborhoods, rents for just $886 a month.

This means that Class-A apartment rents boast a premium of 144.9 percent over Class-C apartment rents in the city. MPF Research ranks Chicago fifth in this type rent discrepancy.

Boston and the Bridgeport/Stamford/Norwalk area of Connecticut top MPF Research’s list. Class-A apartments in these two markets rent for 169.5 percent more on average than do Class-C units.

Expect the rental divide between older and newer apartment units to continue, too. Research from RENTCafe found that 75 percent of all new apartments built in 2015 were high-end luxury ones.

These higher-end buildings, boasting extensive amenity packages, appear to be drawing a greater number of wealthy individuals to the rental market. The apartment search site said that about 1.2 million wealthy households became renters in the United States in the last 10 years. The company reported that from 2005 to 2015, the number of renter households that earn more tahn $150,000 a year jumped by 217 percent.

The trend, then, is clear: As a growing number of wealthy individuals and households choose to rent, landlords target these big-dollar customers with more expensive apartments in the middle of cities.

“There are people in these cities who can afford these monthly rents,” said Nadia Balint, real estate writer for RENTCafe. “The number of high-income renters is increasing. There is room to grow in the high-end market.”

To prove this, Balint crunched some numbers showing just how many renter households in certain Midwest cities can afford to rent these higher-end apartments.

In Chicago, for instance, the average monthly rent for high-end apartment units is $2,500. Going by the rule of thumb that households should spend no more than 30 percent of their incomes on rent, households that earn more than $100,000 a year should be able to afford this luxury-market rent. RENTCafe found that more than 33,000 renter households in the Chicago market earn more than $150,000 a year and can afford these higher-end apartment units. In the Chicago market, there are roughly 33,000 apartment units classified as high-end by RENTCafe. This means that there are enough wealthy renter households to serve this supply, Balint said.

In Detroit, the average rent for high-end apartment units is $1,520, according to Balint. Households, again going by the 30 percent formula, would need to earn about $60,800 a year to afford this rent. Balint said that there are 1,229 households renting now in the Detroit area that earn more than $150,000 a year.

There are also about 3,000 renter households that earn from $100,000 to $150,000 a year and 3,960 that earn from $75,000 to $100,000, meaning that there are plenty of households that can afford these higher-end rents. In the Detroit area, there are now 2,622 high-end units either on the market or under construction. The numbers show, then, that there are plenty of potential customers for these more modern, expensive units.

In Minneapolis/St. Paul, the average monthly rent for high-end apartments is $1,763, Balint said. To afford this, households would need to earn $75,500 a year. There are 4,934 renter households that make more than $150,000. The number of households that are renting and making $75,000 a year comes out to more than 26,000. The supply of high-end apartments in this metro area now stands at 16,439, meaning that there is plenty of room here, too, for builders to add a greater number of higher-end apartment units without straining the demand for them.

But what about the demand for market-rate or affordable apartment units? Plenty of renters are seeking out less expensive apartment units, and they’d like to find them in the middle of cities where all the restaurants, public transportation and entertainment options are.

These renters will struggle to find new-construction apartments, said Sam Radbil, an author with online apartment search company ABODO. That’s because the new apartments that developers are adding to the middle of big cities fall overwhelmingly into the high-end category, Radbil said.

“The national homeownership rate is falling. More people are choosing to rent,” Radbil said. “It makes sense, then, that landlords would raise the pricing of their apartment units, especially in markets with tighter inventory.”

Brian Graham, certified residential appraiser with the Cincinnati office of Colliers International, said that it is just too difficult for developers to build new market-rate or affordable apartment buildings and make a profit at the same time. The only way this can happen, generally? They need to receive financial incentives or tax breaks from local governmental agencies.

That does happen. But most developers still choose to build high-end apartment buildings in downtown areas, Graham said.

But what about the suburbs? Can renters looking for higher-end amenities find them for lower costs if they move away from the center of cities?

Graham said that the apartment market in the suburbs of Cincinnati is strong today, featuring plenty of new construction. And the new apartments being built here, like in the center of the city, feature strong amenity packages. The rents at some of these buildings are lower than in the city, but don’t exactly qualify as affordable-level.

“We are seeing new projects in the suburbs that are very high-intense on the amenities,” Graham said. “They are catering to renters that don’t want to go into an apartment community that is 10, 15 or 20 years old. They want to rent, but they like nicer things, nicer amenities. They want all the amenities and features that you’d expect of a new high-end development.”

Posted in Chicago Commercial Real Estate, Cincinnati commercial real estate, Detroit commercial real estate, Illinois, Illinois real estate, Michigan commercial real estate, Minneapolis commercial real estate, Minnesota real estate, multi-family, Ohio commercial real estate | Tagged , , , , , | 1 Comment

Chicago’s population on three-year drop

budget-van

by Dan Rafter

Moving out of Chicago? You’re not alone. The Midwest city saw the greatest drop in population of the country’s largest metropolitan areas from 2014 to 2015, according to the latest research from ABODO.

According to ABODO, even after accounting for new residents, the population of the Chicago-Naperville-Elgin market fell by 0.84 percent, the highest percentage drop of any large metropolitan area in the United States.

The New York-Newark-Jersey City area came in second in this category, seeing its population, even after accounting for new arrivals, fall by 0.82 percent from 2014 to 2015. In third place came Hartford-West Hartford-East Hartford, which saw a population drop of .74 percent.

Chicago’s population loss isn’t a one-year fluke, either. ABODO looked at the cities with the greatest population loss because of net migration from 2012 through 2015. By this measure, Chicago saw the second-greatest drop in population among big cities in the United States, with the Chicago-Naperville-Elgin market seeing its population drop by 2.06 percent during this time.

Topping the three-year list in population drop was New York-Newark-Jersey City metropolitan area, which a population loss of 2.20 percent during this same time.

Chicago isn’t the only Midwest city seeing population losses during this three-year period. Memphis saw a population drop of 1.77 percent, while Detroit-Warren-Dearborn experienced a drop of 1.40 percent. The population dropped 1.36 percent in the Milwaukee-Waukesha-West Allis market, while it fell 1.15 percent in the Cleveland-Elyria market.

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Chicago celebrates another strong quarter of industrial growth

chicago-industrial

by Stephanie Aguilar, Editor Chicago Industrial Properties

The Chicago area continues to prove that it’s one of the dominant CRE markets in the Midwest. A big part of this? The city’s ever-improving industrial market.

The Chicago-area industrial market continues to soar, with sales, leases and new construction activity increasing seemingly every quarter, good news for the brokers and developers who work in this space.

For the 26th consecutive quarter, the Chicago-area industrial market saw positive expansion in the third quarter of 2016, with nearly 2.4 million square feet coming off the market and 4.9 million square feet of new space coming online, according to the latest research by Newmark Grubb Knight Frank.

Despite the year-to-date absorption of 8.4 million square feet, research shows that vacancy remained static at 7.8 percent. That’s largely due to demand keeping up with supply.

Among the 17 projects–comprising 4.9 million square feet– completed in the third quarter, the Interstate-39 Corridor saw the largest delivery with Venture One’s completion of a 987,120-square-foot build-to-suit for 3M in DeKalb’s Park 88.

But it was the Interstate-80 Corridor that once again brought in the most absorption of any submarket during the third quarter, with 687,000 square feet. The total absorption in the area year-to-date now totals 1.2 million square feet. Meanwhile, vacancy spiked to 9.3 percent thanks to the 1.5 million square feet of speculative space added to the corridor.

Speculative industrial construction remains strong, too, with 57 spec projects in development throughout the market. Collectively, these projects total 18.6 million square feet. There are also plenty of shovels in the dirt for build-to-suits, which are currently seeing 8.9 million square feet in the works.

Two of the largest build-to-suit projects under construction are rising in Joliet. This includes a 1.3-million-square-foot facility for IKEA in Laraway Crossings Business Park and a 1.4-million-square-foot distribution facility for Mars Candy, both of which are scheduled for completion in the first half of 2017.

Market experts are still confident that the market will remain strong. NGKF research attributes factors like rent growth, which continues to accelerate; an expanding construction pipeline; and a reliably strong sales volume, as great signs.

Cushman & Wakefield research shows that developers are continuing to put their land inventories into production, preparing to bring more space onto the market. The firm reports that over the next few quarters, these developers will have to closely watch the demand. If construction activity stays put, vacancy is expected to stay flat.

 

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A merry holiday season for retailers? JLL is predicting one

Image courtesy of JLL.

Image courtesy of JLL.

by Dan Rafter

How active will holiday shoppers be this season? JLL has some good news for retailers: The company in its latest report predicts that holiday sales will grow this year by healthy 3.5 percent to 4 percent.

The survey, though, did find that shoppers of different ages are approaching the holiday season in different ways. According to JLL’s research, Millennials and Gen Xers prefer shopping in discount department stores and online. These younger shoppers are looking for bargains when hunting for holiday gifts, JLL said.

Baby Boomers and those consumers who are older than 70? JLL found that these shoppers prefer traditional department stores. And when they’re looking for gifts, the focus more on quality than price.

This means that Millennials and Gen Xers are more apt to spend their holiday dollars at stores like Walmart and Target and with online retail giant Amazon, while older shoppers tend to spend more time at department stores such as JCPenney and Macy’s.

JLL found that more than 60 percent of Millennials and Gen Xers ranked low prices as one of the factors that most influences where they shop. More than 50 percent of Boomers and older shoppers, though, ranked quality as one of their key factors.

If you’re a retailer, you might covet those Millennial shoppers. But JLL’s research found that more of these younger shoppers are putting strict limits on how much they will spend. According to the research, 30.8 percent of Millennials say they will spend $250 or less for the holidays. Only 10.7 percent of Baby Boomers, though, said that they, too, are budgeting such a small amount.

Overall, JLL found that 28.3 percent of shoppers are budgeting $251 to $500 for the holiday shopping season, while 34.5 percent are budgeting more than $750. JLL found, too, that 19.5 percent of Gen Xers and 23.8 percent of Baby Boomers will spend more than $1,000 this holiday season.

That’s a lot of shopping, and it should make for a merry season for retailers.

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Is your office crave-worthy?

JLL Club Space in the AON Center.

JLL Club Space in the AON Center.

Guest post by Margy Sweeney

Office workers have it made in today’s market. Apps serve up property-centric fire-eating dancers, manicures and kickball leagues. Operable windows bring the sky inside skyscraper tenant lounges (weather permitting). And giant sea creatures adorn tenant-exclusive buses with zero emissions and quick, exclusive trips to the train. Midwest landlords are embracing amenities from the luxurious to the absurd, in the quest to shape buildings that become destination communities, delighting employees and bosses alike.

So who’s paying for all this—and why?

It’s counter-intuitive, after all, that in a landlord’s market, building owners and corporations alike are investing significantly in amenities.  But not all buildings are created equal. At today’s record-high office rents, “location, location, location” is just the beginning. Class “A” landlords must deliver on sky-high tenant expectations, or lose the battle for the top tenants in the market. Attracting top-dollar tenants, or creating must-have corporate spaces, is all about delivering an employee experience that helps win the war for talent.

That’s a lot to ask from an office building—even a trophy property. What’s a landlord to do? 

Winning the War for Talent means bringing workers to an office space that they brag about to their friends, and where they feel part of a larger community. There’s a snob factor at work—but it’s not about marble floors and high end finishes. It’s about aligning with values, connecting with a community, and delivering a professional lifestyle worthy of a city’s best and brightest. Charged with these high expectations, landlords and corporations are delivering by getting more creative than ever before.

Absurd Amenities

Midwest landlords and corporations are making their offices spaces crave-worthy, reinventing once-staid properties, infusing them with a sense of life and creativity. (That’s where the sea creatures and fire-eaters come in.) Here are a few fun new ways building owners and tenants are challenging assumptions, and delivering employee experiences that take the “Dilbert” out of their offices:

Craving: Healthy, CSR-friendly green buildings and transportation

The Fixes: LEED certification and investments in workplace wellness have become “table-stakes.” To up the game, creative investments can delight and transform a worker’s experience even outside the front lobby. 601W Companies, which owns both Prudential Plaza and Aon Center in Chicago’s East Loop, has announced that its tenant shuttle service will become the first privately run, 100 percent zero-emission electric bus fleet in the country. This launch marks the culmination of a three-year process between 601W, JLL, which manages the buildings, The Telos Group, which manages leasing and marketing, and Proterra, the world’s leading innovator in heavy-duty electric transportation. Available exclusively to tenants of both buildings, the buses feature creative and colorful exterior bus wraps that will play to the Fleet’s nautical theme featuring various sea creatures.

Craving: Airport lounge-quality spaces for creating community and increasing productivity

The Fixes: Challenging the limits of an office building’s “skin,” White Oak Realty recently engaged Wright Heerema Architects to build out a new amenity floor at the top of its 29-story office tower at 200 W. Jackson in Chicago’s Loop. One feature: The Notch, a four-seasons hospitality lounge open to everyone who works in the building, with windows that open out to the city when Chicago’s weather permits, and a bar and recreation area designed to give employees a break from the daily grind. Golub & Company’s 625 North Michigan likewise provides a tenant lounge complete with windows that open, allowing the sights and sounds of Michigan Avenue in, and offers a pool table, a big-screen TV and event space.

Craving: Communities that connect workers beyond the boundaries of their individual work areas

The Fixes: Tenant lounges are one way to create a setting for interaction within an office building community; the next step is what companies and building owners do with those engaging settings once they are built, and how to integrate their use into everyday professional life. JLL studies show that more than 80 percent of meetings include only two to four people. So instead of offering the conventional office design consisting of individual desks and large conference rooms in their global headquarters within Chicago’s Aon Center, JLL is shifting its attention to huddle rooms, open work areas, cafés and a club space that promote collaboration and productivity.

For multi-tenant environments, community means connecting workers from multiple organizations. The Building Social mobile app and services platform brings crave-worthy experiences and amenities such as mani-pedi days, building-sponsored kickball leagues and happy hours that feature extraordinary entertainment like fire-eaters and top-shelf liquor. Social media and live events come together, shaping a building community that encourages workers to mix, mingle, and enjoy their office experience—with all members of the property’s community.

Culture: what tenants really crave 

From changing a building envelope to creating a multi-tenant building community, challenging assumptions is at the core of each of these ideas. As companies focus more on experience, and less on simply putting proverbial “butts in seats,” buildings that build a culture will ultimately enjoy an advantage when positioning their spaces as weapons in the war for talent.

For corporations, investment in creative amenities drives employee engagement scores skyward. For investors, building a culture within a property can help attract the most desirable tenants. But the bottom line isn’t about glitzy spaces or expensive events—it’s about culture, and the employee experience.

Start with building the setting—then use culture to make your offices truly crave-worthy.

Margy Sweeney is an entrepreneur with more than 20 years of experience marketing and publicizing commercial real estate. She is the founder of consulting firm @TeamAkrete.

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Expect shoppers to flock to the stores this Thanksgiving weekend

black-friday

The someecards site might have the right idea about Black Friday.

by Dan Rafter

What are your plans for Thanksgiving? Planning on watching some football after wolfing down your turkey and pumpkin pie?

Or are you going to get a jump on your holiday shopping?

If you’re like a growing number of people, you’re aiming for the latter.

The National Retail Federal reported in its latest survey that an estimated 137.4 million U.S. consumers are either planing to shop or are considering hitting the stores during Thanksgiving weekend.

That comes out to 59 percent of Americans who are considering adding a dash of retail to theri Thanksgiving retail plans.

The numbers from the survey — conducted by the National Retail Federation and Prosper Insights & Analytics — cover Thanksgiving Day, Black Friday, Small Business Saturday and Sunday. The numbers also include both in-store and online shopping.

And if you think more people are planning their Thanksgiving celebration around shopping, you’re right. The retail federation said that last year 58.7 percent, or 135.8 million Americans, planned to shop some time during the holiday weekend.

“Black Friday remains one of the busiest shopping days of the year, with Americans planning to take advantage of aggressive in-store and digital promotions over the entire holiday weekend,” said Matthew Shay, president and chief executive officer of the retail foundation, in a written statement.

According to the survey, 21 percent of shoppers plan to hit the stores on Thanksgiving Day. Black Friday, of course, is predicted to be the busiest shopping day of the weekend, with 74 percent of weekend shoppers hitting the stores that day. An additional 47 percent say they will shop on Saturday.

Not surprisingly, younger people say they are more likely to shop. The survey found that 77 percent of 18- to 24-year-olds planned to shop over the Thanksgiving weekend, while 76 percent of 25- to 34-year-olds planned to do the same thing.

“Millennials continue to drive the trend of hitting the stores – both on their feet and online – as soon as the turkey is finished,” said Prosper principal analyst Pam Goodfellow in a written statement.

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