2009 Overview – Chicago Loop Retail Analysis

‘Uncommon strength’ for Loop retail market

Retail vacancy downtown climbed last year as several stores and restaurants in the Central Loop closed shop amid a recession that socked retailers nationwide.

The Loop’s retail vacancy edged higher to 14.1% last year from 13.7% in 2008, which was a six-year low, according to an annual report by retail brokerage Stone Real Estate Corp.

The Loop’s performance in 2009 was stellar, considering the overall economy and retail climate, says John Vance, a vice-president with Chicago-based Stone and co-author of the report. Mr. Vance says he predicts the vacancy rate will decline in 2010.

“The Loop market has simply defied convention these last two years by displaying uncommon strength during these difficult times,” Mr. Vance writes. “As the economy tumbled further into recession during 2009, the Loop retail market experienced barely a tremor.”

He attributes the performance to the Loop’s diversity from its office traffic to the theater district and increased residential and college student populations. Rents, of course, have come under pressure, and Mr. Vance estimates they’re down on average about 15% from fall 2008.

While several notable stores and restaurants closed their doors last year, including Nick’s Fishmarket and Prairie Avenue Bookshop, new entrants continued to be more prominent.

The new State Street mall at Block 37 debuted, with Puma, Zara and Steve Madden opening around Thanksgiving. TheWit hotel and its two restaurants also opened last year, along with several other restaurants including the Tilted Kilt, Sweetwater Tavern & Grille and a new NYC Bagel location.

The Lakeshore East development east of Columbus Drive, which Stone factors in to the Michigan Avenue Corridor submarket, landed two big leases, with grocery chain Roundy’s and a III Forks steakhouse. Construction began on the new development last month, with completion pegged for 2011.

“You now have retailers that have never looked at the central business district saying, ‘I’ll take a look on State Street,’ because there’s a perception it’s now a six- to seven-day-a-week market,” Mr. Vance says. “Having Anthropologie (at Block 37), Steve Madden, Puma and Zara, that’s big. It’s critical mass, and it creates a bigger snowball.”

Almost all of the overall rise in vacancies can be attributed to the Central Loop, which includes State Street, where the vacancy rate increased to 16.1% from 14.8% because of several closings, including Nick’s and Prairie Avenue.

Vacancies in the two other submarkets were flat or down. In the LaSalle/Wacker Corridor, which runs from the Chicago River to Clark Street, the vacancy was essentially flat at 10.2% compared with 10.1% in 2008.

The Michigan Avenue Corridor saw its vacancy fall to 15.8% from 16.7% in 2008, thanks to the Roundy’s and III Forks leases.

Those two deals are allowing Lakeshore’s developer, Magellan Development Group LLC, to break ground on a $60-million retail building. The developer and its Korean partner, Hanwha, are contributing about 50% in equity while another $30 million is to come from two banks, says Magellan President David Carlins.

“We think it’s necessary to really solidify the residential community and make it a better place to live,” says Mr. Carlins, who adds that III Forks, a unit of Dallas-based Consolidated Restaurant Operations Inc., has leased about 12,000 square feet and will have a rooftop deck. The restaurant company also has a signed lease for an upscale Mexican restaurant, Cantina Laredo, in River North, says a source familiar with the matter.

Stone’s report factors in retail space that’s not yet built or occupied but was marketed, such as the former Carson Pirie Scott & Co. department store that’s being converted into small-shop space. Block 37 was first counted as in-service by Stone before last year.

The firm defines the Loop retail area as bounded by the Chicago River on the west and north, Lake Michigan on the east and Congress Parkway on the south. The area has 3.85 million square feet of retail space, excluding department stores, which aren’t counted, compared with 3.76 million in 2008.

Stone also tracks retail vacancies in the West Loop, an area defined by Interstate 90/94 on the west, Lake Street on the north, the Chicago River on the west and Congress Parkway on the south. The vacancy rate there fell to 23.8% from 29.1% in 2008. The long-awaited MetraMarket opened last year while the retail space at the massive Presidential Towers is now being redeveloped.

“For this area to achieve retail credibility, these two large projects need to achieve continued retail success,” writes report co-author James Vender, an associate at Stone. “If that occurs, the area west of Clinton will have a chance for enhanced retail development over the next 10 years.”