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As Lenders Turn From Retail, Other Sectors Take Its Place

Lenders are shying away from retail, where the flood of bankruptcies and closures seems to go on and on. Instead they are turning to healthier sectors in Chicago.

The Apartments at Lincoln Common

“I am focusing mostly on apartment buildings,” BMO Harris Bank Director of Real Estate Finance Jerry Lumpkins said. He will speak at Bisnow’s Chicago Capital Markets and CRE Finance event on July 31.

“Retail is just persona non grata right now, given the number of store closures,” he added. “The shift to online purchasing is really devastating to that segment of the market.”

He estimates about 80% of his current deals are for apartments, up from about 60% 12 to 18 months ago when he still did a healthy number of retail deals.

“Instead of trying to find those needles in the haystack of retail, I focus that energy on the apartment side.”

The difficulty many retailers have in just surviving was highlighted by this week’s announcement by A&G Realty Partners that on July 24 it will auction off in Chicago six vacant Shopko boxes and 61 vacant outparcel sites, located across 16 Midwest and Western states, as part of that merchant's Chapter 11 bankruptcy.  

But Lumpkins, who concentrates on projects in the Midwest, Arizona and Florida, said the troubles in retail go beyond traditional outlets. He points out that even bank branches and drugstores like Walgreens and CVS, which used to provide landlords with stability, are shutting down these days due to competition from online banking and online pharmacies.

The CVS at Monroe and LaSalle streets in downtown Chicago, for example, recently closed, and Lumpkins said it is an ominous sign.

“Who would have thought that would close? That’s right at Main and Main.”

In addition to apartments, Lumpkins sees great things ahead for medical office buildings.

“You can’t Amazon those out of existence, and with baby boomers continuing to age, we see demand increasing and will look to do more in that space.”

Others have adopted similar strategies.

“The property types most in favor with institutional investors across the country are multifamily and industrial, and Chicago is no exception,” said Barings Real Estate Advisers Managing Director Pam Boneham, who will also speak at the Bisnow event. “Niche products such as self-storage and medical office are also in favor as defensive strategies in Chicago and elsewhere.” 

The apartment side, while having phenomenal success throughout much of the Chicago region, especially near the city center, is not without its own challenges.

A Jo-Ann Fabrics store at The Orchards Mall in Benton Harbor, Mich.

“Finding good deals that make sense is the real problem now,” said McCaffery Interests Senior Managing Director Clayton McCaffery, another panelist at the event, which will be held at Twelve01West, one of McCaffrey’s properties in Chicago’s Fulton Market District.

Land prices and labor costs keep escalating throughout the Chicago region, he said.

“As a developer, we’re the ones who get squeezed.”

But once a developer can make the numbers work, financing is available.

“There is a ton of money out there, in fact, there is more money than there are deals. We’re a very conservative institution in terms of what we pursue, and there are deals we walk away from, and then we later found out someone else found money for it.”  

His company recently welcomed the first residents to The Apartments at Lincoln Common, a 538-unit community it developed with Hines in Lincoln Park.

How long the money will continue flowing depends on the health of the overall economy, he said. But even if a recession develops, McCaffery doesn’t worry.

“I tend to be not much of an alarmist, so I don’t think the sky would fall,” he said.

Lumpkins said the discipline shown by the investment community means today’s market has stronger foundations than the more unstable market that developed in the run-up to the Great Recession. The continuing robust demand for apartments in the city should help developers and landlords make it through a downturn, as well as keep confidence high among lenders.  

“We’re 10 years into this recovery, and there’s no doubt that this has been a hell of a run,” Lumpkins said. “No one can say if we will have another three or four years, but even when there is a correction, it shouldn’t be that bad.”

Even the city and state’s well-publicized struggles with balancing their budgets, and the likelihood of higher taxes, should not impede Chicago’s progress, largely because investors can secure higher returns here, Lumpkins said.

“It’s still a bargain compared to the coasts, and a much healthier city than it was 20 years ago.”      

Much of that new strength comes from the establishment of new office submarkets such as Fulton Market and Goose Island that can hold investors' attention long term, Boneham said. 

“Fulton Market has drawn a lot of investment activity from Chicago players, as well as many investors outside of the city. The excitement is there because of the opportunity to serve a growing young, well-educated population base in the area, and the willingness of office users to leave the CBD to attract this important sector. Multifamily, hotel and retail development have followed.”

Hear more from Barings Real Estate Advisers Managing Director Pam Boneham, Zeller Realty Group principal Bill Rogalla, BMO Harris Bank Director, Real Estate Finance, Jerry Lumpkins, McCaffery Interests Senior Managing Director Clayton McCaffery and KeyBank Vice President Jacob Proctor, among others at Bisnow's Chicago Capital Markets and CRE Finance conference on July 31.