CHICAGO — Bon-Ton’s closing of 22 Chicago-area Carson’s stores will strike investor confidence in a retail sector already reeling from a drop in lending the past year.

“This will hurt investor interest in every retail asset class except grocery and food. Empty boxes will not land financing unless there is a solid redevelopment plan in place,” Quantum Real Estate Advisors President Chad Firsel said.

Experts believe the sector’s market fundamentals have retail poised for a rebound. Marcus & Millichap’s 2018 Chicago Retail Investment Forecast predicts area retail vacancy is expected to drop 60 basis points this year to 6.4% on 4.4M SF of net absorption. Construction of new retail will decline to 1.7M SF, with the majority of that new inventory in the suburbs.

But investment in U.S. retail assets fell under $20B in Q4, its lowest level since mid-2014, CoStar Managing Consultant Ryan McCullough said.

This is shaping up to be a perilous year for retail real estate, with closures even more profound than 2017, and the debt market is tightening its fist.

Retail lending in the Chicago market plummeted 47% in 2017, to $1.9B, a CrediFi report reveals. That led to an overall 17% drop in commercial real estate lending in Chicago last year. Firsel said the closures of Bon-Ton, Nine West, Toys R Us and the ongoing Sears death watch will have investors and lenders across the country only seeking out can’t-miss opportunities with strong sponsors in the best urban and suburban locations.

“This further breaks down the have and have-not landscape in retail. Older rural and tertiary product in need of major makeovers is virtually unsalable,” Firsel said.

The pullback in lending is the result of the lessons learned from earlier in the lending cycle, Firsel said. Bigger portfolio deals were driving the larger financing packages, something that is not happening with all of the closures the past couple of years. The closures are affecting net operating income on institutional malls, and operators of these malls — who typically don’t put in more than 50% of their own equity — may not have enough proceeds in place to refinance existing debt.

Another factor fueling the drop-off in retail lending is a lack of opportunities. The Unibail-Westfield and Brookfield-GGP mergers have been the only major portfolio deals of note in the past six months, and the rash of store closures in recent weeks will have investors flocking only to the best “Main on Main” single investment opportunities.

Those assets are increasingly rare, and a rise in vacancies and flat rent growth at Class-A malls and lifestyle centers is pushing investor interest into smaller product, CoStar reports.

There are some bright spots. Lower taxes and favorable demographic trends are drawing investors to Chicago's collar counties for retail opportunities, with Lake County seeing particular interest.

Specialty sponsors with long-term hold strategies and net lease assets will continue to find financing. MetroGroup Realty Finance, a Newport Beach, California-based mortgage company, secured a $3.7M refinancing package for a three-property Walgreens portfolio in Park Forest and Rockford, Illinois, on behalf of the sponsor, Scott Ketchum. MetroGroup President Patrick Ward said Ketchum, a Walgreens specialist, bought the properties at attractive prices with 50-year leases in place, ensuring alternative uses would be viable if Walgreens exercised the termination clauses in its contracts. Ward said having an investment-grade tenant like Walgreens and the length of the leases in place helped MetroGroup replace the existing debt with attractive new terms.