2010 Overview – Chicago Loop Retail Analysis

Loop retail vacancies tumble with help from eateries

The Loop retail vacancy rate fell last year to its lowest level since 2002 as retailers, led by restaurant chains, expanded downtown as the economy improved.

The vacancy rate declined to 13.6% from 14.1% in 2009, according to an annual report by the Chicago-based retail brokerage Stone Real Estate Corp. The rate will drop considerably further because of Target Corp.’s recent announcement that it has leased a State Street store that’s to open next year.

The report credits the improving economy along with increased interest from retailers and restaurateurs in finding locations in dense, downtown markets with lots of foot traffic. Even during the recession, which decimated retail markets nationwide, rents throughout the Loop held relatively steady as retailers, particularly higher end fast-food restaurants known as fast-casual chains, remained active.

“The Loop just kind of kept on going on,” says John Vance, a Stone vice-president and co-author of the report.

Mr. Vance says Target’s deal for a two-level store in the landmark former Carson Pirie Scott & Co. building, which the company announced Feb. 15, will bolster retailer’s interest and prompt landlords to start pushing rents.

“Today, the availability of street-front space on State Street is essentially zero,” says Mr. Vance. “I think you’re going to see rents increase.”

Restaurateurs say good sites in the Loop with appropriate kitchen and exhaust systems are already tough to come by, and that the recession didn’t help their cause when negotiating leases.

“Nobody gave any space away,” says Bill Post, co-founder and president of Chicago-based Roti Mediterranean Grill, which this spring will open its fourth downtown location. “Most of the spaces that come onto the market are already well-scouted by the guys much bigger than us.”

Roti, which opened its first restaurant in early 2007, opened last year at 33 N. Dearborn St. and in May is to open a new location at Randolph and Wells streets. Other fast-casual chains that opened downtown last year included Hannah’s Bretzel, Qdoba, Pret a Manger and Freshii.

Of course, downtown’s market has had its struggles.

The biggest new retail development, Block 37, remains just 40% leased with its top two floors yet to open more than a year after the four-level, 280,000-square-foot center opened at 108 N. State St.

Several prospective tenants defected, and developer Joseph Freed & Associates LLC has been locked in a bitter court battle with Bank of America Corp., which inherited the project’s loan from LaSalle Bank and sued to foreclosure just weeks before the mall opened in November 2009.

But the mall, which the bank is poised to take over next month, added a Disney Store in September 2010, and an Eileen Fisher women’s apparel store is slated to open this spring.

Chicago-based Freed, State Street’s biggest landlord, also owns the former Carson’s building at 1 S. State St. where Minneapolis-based Target plans to open in October 2012.

The State Street store, in the rechristened Sullivan Center, will total about 125,000 square feet but feature just about 54,000 square feet of selling space. Target executives say they are looking for additional sites downtown for another so-called CityTarget store.

Counting the CityTarget space as leased, the vacancy rate in the Central Loop submarket would drop to 10.2% from 15.9% at the end of last year, says Stone’s Mr. Vance. That would be the lowest since 2006 for that submarket, which spans from the east side of Clark Street to the west side of Wabash Avenue. The rate had climbed to 16.1% in 2009.

The Michigan Avenue Corridor, which runs from the east side of Wabash to Lake Michigan, saw its vacancy rate edge up slightly in 2010 to 15.9% from 15.8% in 2009.

The vacancy rate in the LaSalle/Wacker Corridor fell last year to 8.9% — a record low since Stone began compiling the data in 2002 — from 10.2% in 2009. Food was the big story in the submarket, which runs from the Chicago River to the west side of Clark Street. Prime Bar opened in the new office tower at 155 N. Wacker Drive, while Wells Street drew casual eateries including Westminster Hot Dog, Perogi Palace and Bombay Wraps.

There was one notable apparel lease in the LaSalle/Wacker market, as Paul Stuart Inc. is soon to open a 3,600-square-foot store in the new J.W. Marriott hotel at 208 S. LaSalle St. This is the upscale clothier’s second Chicago store after moving its longtime outpost from the Hancock Center in fall 2008 to Oak Street in the Gold Coast neighborhood.

Paul Stuart had been looking downtown since moving out of its cavernous Hancock Center store, Jack Donahue, the New York-based retailer’s chief operating officer. He says he liked the site’s connection with the Marriott, the offices above the new hotel and the store’s proximity to Metra commuters.

“We love LaSalle Street,” says Mr. Donahue. “You have a density of white-collar workers and key executives, and that’s kind of who we appeal to.”