Low interest rates and stable rents have fueled a steady increase in Chicago’s retail property values, says a recently released report from Encino, Calif.-based Marcus & Millichap.

"Cautious optimism defines the 2003 Chicago retail outlook, with positive employment growth, decreasing vacancies and moderate appreciation in rents expected," says Greg Moyer, senior vice president and regional manager of Marcus & Millichap’s Chicago office.

According to the report, average rents rose 1.5 % through the first nine months of this year, despite sluggish job growth.

Third-quarter employment in Chicago was off by slightly more than 1% when compared with the same period last year, while the retail sector avoided a net job loss. Total employment in the third quarter of 2002 was only 1.5% below its pre-Sept. 11 levels Employment for the region is expected to grow 1.8% in 2003, though employers remain reluctant to begin rehiring until the economy has strengthened.

According to the report, early indications suggest that metro-wide average rents could increase by 2.5% by the end of this year.

Chicago’s retail vacancy rate rose to 11.8% in the third quarter, due to fewer Chicago-area retailers seeking new space, coupled with the addition of new supply. On a bright note, however, nontraditional users have begun to take down available second-generation retail space, says the report.

Improving market fundamentals will spur shopping center sales in 2003. Long-term, improving fundamentals should support "meaningful" appreciation in values.

The report predicts that investors will continue to pursue single-tenant, net-lease opportunities throughout the Chicago-land area, despite a lack of available product and increased scrutiny of tenant credit.