Landlords Hold The Cards As Chicago Retail Tenants Navigate Dry Construction Pipeline
Retail tenants are moving through the stages of grief as rental rates climb and available space vanishes in Chicago’s tightening retail market.
Baum Realty principal Deena Zimmerman joked at Bisnow’s Chicagoland Retail Summit that the tenants she represents move a little closer toward acceptance of the current state of the market every day.
The sector has come a long way from predictions of its death at the hands of e-commerce, said Zimmerman and other panelists at the event held at Pella Signature in Burr Ridge. But it has also been a victim of its own success.
“There really isn't a lot of vacancy, which is a great thing, especially for those who are investing in commercial real estate and retail,” Zimmerman said. ”But for those of us who are tenant reps, we're in a lot of trouble because we can't find space.”
National retail vacancy fell to 4.1% by the end of 2024, per a JLL year-end report. Malls fared worst at 8.7% vacant, while general retail vacancy stood at just 2.5%.
Chicago’s retail vacancy rate dropped to a new low of 5.1% in mid-2024, marking seven consecutive quarters of tightening, according to a fourth-quarter 2024 Marcus & Millichap report. Prior to this streak, the previous low mark for vacancy was 5.9% in 2018.
“Gone are the days where we're finding rents $25 to $35 [per SF],” Zimmerman said. “Realistically, it’s $45 to $55 if you're along the Southport Corridor or in Fulton Market. You're looking at all-in $100 per SF. And that's just the reality right now.”
Sometimes it takes Zimmerman up to a year to find space that works for her clients as Chicago’s single-tenant retailers gobble up vacant storefronts.
In the 12 months ending June 2024, Chicago’s single-tenant retailers absorbed nearly 1.4M SF, or about 93%, of the metro’s total net absorption, according to Marcus & Millichap. Nearly half of the total absorbed square footage was in the metro’s north and northwest neighborhoods along Interstate 90.
Vacancy has tightened, in part because construction has fallen off a cliff. Chicago added just 183K SF of new retail in the first half of 2024, the city’s smallest six-month supply influx since at least 2007, according to the brokerage.
But just as tenants adjust to tighter space and rising rents, new headwinds are emerging. Tariffs put in place by the Trump administration, including a 145% levy on all Chinese imports among other taxes, threaten to further strain an already bone-dry construction pipeline.
That could benefit owners who end up getting space back, said Mike Hazinski, chief investment officer at First National Realty Partners. Those owners will then be able to release the same spaces at higher rates, he said.
“Retail is very well positioned when you think about supply and demand for space,” Hazinski said.
As far as the construction environment goes, the new ground-up construction deals Abbell Associates CEO Liz Holland has been working on are still in the works. No one has pulled out of a deal yet or repriced a letter of intent to negotiate a lease.
But she knows things could change quickly.
“We're hopeful that that continues, but it's really hard to know, and part of the challenge is just the uncertainty of it,” Holland said. “This is such a long-lead-time business when you're building something, and so it's just been really hard.”
Some of the tenants Zimmerman represents have faced significant additional lead times in acquiring the equipment they need to open stores, with timelines extended from a four- to six-week window to 18 to 20 weeks.
That has led her to ask for additional free rent for clients because they aren’t able to operate without receiving the equipment, she said.
More than ever, tenants and landlords are working together to navigate the environment even before a lease is signed, which the industry hasn’t done in a long time, Zimmerman said.
“We're talking about it. We know it's happening,” Zimmerman said, “Let's come up with solutions.”
