by Bianca Herron
Illinois Real Estate Journal recently spoke to Charles Margosian III, senior vice president at Lombard, Ill.-based Highland Management Associates, about the retail market in the Midwest’s largest city. Here’s what he had to say.
Illinois Real Estate Journal: How is the current retail environment in Chicago?
Charles S. Margosian III: It’s an interesting one. We’re looking at cap rates and yields in the retail spaces that are close to the record-low cap rates and record-high prices that we saw in 2006 and 2007. Much of that is being driven by the low-interest-rate environment still. However, as we look at opportunities we’re finally seeing properties for sale where the rents have been marked to market and we do not have these higher legacy rents. With the improving economy, it looks like we’ll start to see rental growth come in.
IREJ: What are some of the recent trends in the retail market?
Margosian: Overall, we’re more positive on the retail real estate environment here at Highland Management. We have been more positive certainly since 2008 and possibly since 2004 or 2005. It seems like some of the available acquisitions may be priced expensively from a yield perspective. They have a lot of upside growth in cash-flow potential. So as investors we see this as an interesting and exciting time. In many of the markets where we operate, we have rents that are in the mid-to-high- teens. Those kind of rents are a long way from justifying new construction, so we think it will be a while before we start to see new construction in retail.
IREJ: What are some of the challenges right now?
Margosian: What we’re seeing right now in the retail space with some of its challenges is that it’s still very difficult for the traditional “moms and pops,” a small retailer who wants to start an entrepreneurial business or purchase a franchise. It’s still very difficult for them to get financing. The bank financing for those types of folks is far more difficult to obtain. So while there’s a healthy number of larger national tenants in the market who seem to be expanding, we’re still not seeing as many “moms and pops,” and we don’t see that changing until the market for financing gets better for those folks. Quite honestly, we still hear with reasonable frequency from tenants in our shopping centers that are continuing to struggle. The long cold winter here in Chicago hurt a lot of restaurateurs, and there are still tenants struggling. So it is still challenging to keep the small stores and the retail centers full.
IREJ: Why is it so hard for traditional “mom and pop” stores to obtain financing from the bank?
Margosian: I think historically there were a couple of sources that these folks would turn to, one being a home equity line of credit. A second often times would be a 401(K) that they could borrow against from whatever job they had worked in. A third could even be an inheritance from their parents. A lot of those avenues have dried up because the banks just aren’t lending the way that they used to in these arenas. To get some of the SBA loans is very difficult for a startup. So there’s just not nearly enough money being lent by the traditional financing sources as there was before the economic downturn.
IREJ: Has the retail market been better post downturn?
Margosian: There’s no question it has improved significantly. There has been a shift in the types of tenants that we’re seeing out there expanding. I would say that those that are expanding are aimed more toward the value- conscious consumer. We are seeing tenants like Anytime Fitness and Blast Fitness that are gyms. But with the value proposition that consumers pay less than $20 a month, they are very active in the market. The dollar stores remain active. Secondhand stores like Good Will and Favors have expanded their operations. All of these are tenants that were not as predominant or visible prior to the downturn.
IREJ: So do you think that the retail industry is steadily climbing upward?
Margosian: I think at least in the foreseeable future, for the next two to three years, we have an improving environment for retailers. We think that the economy will continue to improve and with that retail sales should increase. Coupled with the fact that since 2008 we have had extremely limited development of new space, we think that well-located shopping centers will see some meaningful rent growth over the next three to five years.
IREJ: Why has there been a limited development of new space?
Margosian: With the shift in the type of retailers that caters to the budget-minded consumers, obviously not only are they price-driven in what they offer the consumer, they are price-driven when it comes to the real estate and the rents they can pay. So now it’s much different to sell a Louis Vuitton bag at retail versus a dollar store. They’re able to pay much lower rents and, therefore, the rents that the tenants that are out there right now are able to pay are just generally not high enough to justify new construction or new buildings.
IREJ: Are there any exceptions that you have seen to that?
Margosian: The exception we’ve seen to that is in some of the in-fill areas, the near-in suburbs or higher-end suburbs, where we see re- development of under-utilized or dilapidated real estate being significantly remodeled or demolished and rebuilt as a new store for smaller users in those locations where there is no more vacant land to build on.
IREJ: Is there anything else you would like to add?
Margosian: I just think we’re all pretty positive on where the market is going. I would say that in the financing markets, the lenders are more active and continue to be more interested in making loans on retail real estate, which helps both values increase but also will help generally with real estate continuing to rebound. So we think the financing markets along with the real estate markets will continue to improve and get better as the banking system gets healthier in the United States. So it’s another positive sign, we think, for the retail market going forward.