A strange thing is happening in Chicago’s northern suburbs – fine-dining restaurants that didn’t previously set foot outside the city are rushing to open there.
Le Colonial, a staple of the city for years and one of Chicago’s most stylish restaurants this year announced A new location in the Lake Forest. Recently near Vinnetka welcomed A French bistro and a high-end steak restaurant owned by a hospitality conglomerate that had previously focused on the downtown area.
The immediate reason for this change, of course, is that the pandemic and the resulting remote work have reduced pedestrian traffic in many city centers and created a new market of well-meaning consumers who are in and around their homes. Spending more time than ever before. ,
But it’s just one part of a bigger picture in brick-and-mortar retail that contradicts the dominant narrative predicting the end of brick-and-mortar retailing. Retail real estate is proving to be resilient and is even poised for a rebound, despite pressure from Covid and rising online channels.
A big reason for my relative optimism about retail real estate is the increase in American entrepreneurial activity that has been sparked by the pandemic. According to Census Bureau data, the average number of business startup applications grew by 58% between April 2020 and November 2021, after a steady decline for more than a decade. These entrepreneurs often (or eventually will) need physical retail space.
The pandemic has forced millions to rearrange their lives and rethink their priorities, breaking away from the 9 to 5 template. Plus, an influx of government support has put the entrepreneurial economy at risk and helped by lower-than-normal retail lease rates, giving people the courage and opportunity to pursue their startup ideas.
This means more retail locations will be occupied by businesses to come. And as these businesses begin, they will often require overhaul and repurposing of the physical footprint; Whether it’s an old old building being renovated as a new restaurant, or a hair salon redesigned as a doggie day-care center, these places will recycle.
Does this mean that physical retail activity will start taking stake out of online? Maybe not. But it does mean that the outlook for a large part of the $426 billion commercial construction industry will be much brighter than is currently experienced.
Commercial construction activity slowed down slightly last year, but we anticipate it will pick up again in 2022 and beyond. Over the next four years, we expect retail construction to grow at an annualized pace of approximately 3.3%-3.5% – net of inflation – outpacing broader commercial construction activity.
The trickle-down benefits are substantial. The demand to remodel and redecorate the retail space is on the rise, bolstering the entire ecosystem, from construction firms to building products to architects and interior designers. Property owners will also benefit, even if they are leasing at lower rental rates than before. After all, it’s much better than having empty space.
Significant expense on retail manufacturing occurs when a lease is changed. This can be quite large even for relatively small projects.
There are some risks and unfavorable conditions in this scenario. Inflation can push renewal costs higher, reducing the risk appetite of entrepreneurs. In an inflationary environment, convertible new fixed mortgage payments will also increase, although existing fixed mortgages will remain unaffected. A major stock market correction can reduce the investment potential of some entrepreneurs.
Overall, however, the coming years are likely to show that the end of physical retail activity has been exaggerated. Chicagoans, who are now enjoying Loop-quality dining options in the northern suburbs, likely agree. The rest of us can also expect that there will be many new businesses to remodel old, empty spaces.
Rob Rourke LEK Consulting is the Vice Chairman, Global Industrials.