Real Estate Investor Sentiments
An abundance of capital continues to target retail assets in Illinois, and, with limited opportunities, we are seeing that capital become more flexible and aggressive for the right deal. For example, Rockford has become a viable market for some investors that may not have considered it five years ago. In our discussions with capital sources both locally and nationally, we hear consistent sentiments and trends across the sector that are worth noting.
Retail Fundamentals Remain Healthy
Retail occupancy levels in Illinois continue to be healthy with an average of 95.8 percent across all retail asset types. That level is 93.8 percent across the top to markets nationally. While big-box stores do become available when tenants vacate, the overall health of the market remains strong.
Rents continue to show growth, and real estate retail in Rockford, IL is no exception. Illinois saw rates grow roughly five percent in 2018. Large-format retailers and grocery stores can negotiate some reductions in exchange for more favorable terms, but smaller shop tenants who renew their terms are generally accepting options as stated in their leases. Investors acquiring large-format centers are writing down rents in these scenarios, which is in response to the reality of these negotiations.
Headline Risk Has Overshadowed Retailer Performance
Many retailers have posted strong earnings reports and improved profit margins over the course of 2018. Leading the way is Amazon with third quarter 2018 sales amounting to $56.6 billion. Equally important categories include discount retailers, home improvement and the continued expansion of the fitness space. While 90 percent of retail sales still occur in physical stores, it is hard to deny the effect of e-commence with sales growing 15.2 percent in 2018. Both traditional and on-line retailers are working to capitalize on omni-channel approaches to reach the entire customer base. Landlords are finding newer, smarter and more creative retailers to create energy in their retail centers.
Record Low New Inventory
The most notable part of the transformation of the retail industry is the slowdown of new construction and the corresponding reduction of retail space. The number of retail buildings nationally decreased 1.04 percent in the third quarter of 2018 and 7.88 percent year over year from 2017. This reflects the way many retailers are adjusting their total footprint to fit the new market. Lately, Illinois ranked as having the largest decrease in retail square footage per capita among 20 of the largest U.S. metros with a decrease of roughly 2.7 million square feet. This helps explain why only 1.1 percent of Illinois’s total retail square footage is new inventory. Between 2017 and 2018, Illinois saw an average of 2.5 million square feet of new retail inventory (the 35-year average is 3.6 million square feet). This compares to 225 million of existing retail square feet across real estate retail in Rockford, IL.