Loop retail vacancy falls to 10-year low
Micah Maidenberg, March 4, 2013
Retailers keep finding reasons to set up shop in the Loop, with vacancy falling to a 10-year low last year.
The vacancy rate in the downtown retail market has reached its lowest level in a decade, down to 11.9 percent in 2012 from 13.6 percent in 2011, according to a report by Stone Real Estate Corp., a Chicago-based brokerage.
It’s the lowest downtown vacancy rate since 2002, when the rate fell to 13.4 percent despite the recession of the year before. But the weak economy eventually took its toll on the retail sector, pushing up the downtown vacancy rate to a peak of 18.2 percent in 2004, Stone’s data shows.
The vacancy rate decline is all the more remarkable because the total amount of downtown retail space between Lake Michigan on the east, the Chicago River on the north, the river on the west, and Congress Parkway to the south, has climbed about 44 percent, to 4.3 million square feet, in 2012, up from 3 million square feet in 2002, according to Stone.
In 2012, the vacancy rate was driven down by two new leases totaling more than 91,000 for State Street stores that had been left empty after tenants filed for bankruptcy.
At 1 N. State St., Burlington, N.J.-based Burlington Coat Factory Warehouse Corp. soaked up the 60,000-square-foot former Filene’s Basement space. A block north, Gap Inc. leased the 31,282-square-foot former Borders Group Inc. outlet at 150 N. State St. San Francisco-based Gap moved its Old Navy store to the new location from 35 N. State St., which it plans to use for a new Gap outlet.
“It’s the continuation of retailers looking for high-traffic areas,” said John Vance, vice president at Stone and the author of the report. “They’re really focused on this: ‘We have to go where the people are.’ In Chicago, that’s the Loop.”
While office workers generate daytime demand for retail stores and restaurants, residential development has stretched the market into a 24/7 environment, he said.
Residential development will continue to bolstering the retail market, with the conversion of 188 W. Randolph St. into a 312-unit rental building and apartment developments under way at 111 W. Wacker Drive and 73 E. Lake St. that will deliver another 836 units.
“With the increased residential population and supply of apartments, the evening and weekend traffic is already there,” he said. “It’s just making what is already a strong market even stronger.”
Net rents along State Street in the Loop now range from $95 to $125 per square foot, according to the Stone report, while rates on Michigan Avenue hover between $100 to $120. That compares to about a net rent of about $60 per square foot on both streets in 2007, Mr. Vance said.
Competition for spaces isn’t just pushing rents higher. Building owners are also driving harder bargains for tenant improvements, the amount landlords invest to help retailers open their outlets, according to Allen Arthur, vice president of store development at Specialty’s Café & Bakery Inc. which last year leased a 6,000-square-foot space in the Inland Steel building, 30 W. Monroe St.
“It’s becoming more of a landlord-driven deal,” he said.
The San Francisco-based restaurant chain, which offers breakfast and lunch options, catering to officer workers, now has three locations in the Loop. The company is negotiating a 10-year lease renewal for its restaurant at 191 N. Wacker and plans on adding one or two more locations downtown.
The Stone report covers lower-level, first- and second-floor retail space in the central business district. It does not include department stores such as the Macy’s flagship at 111 N. State St., nor the upper two floors of the Block 37 vertical mall, since such large blocks of space would have an outsized impact on the vacancy rate.
The Block 37 mall remains a key challenge for the Loop retail market.
Last spring, Los Angeles-based CIM Group purchased the 305,000-square-foot structure, which remains mostly empty and lost a tenant in 2012.
In September, CIM bought development rights allowing it to build hundreds of apartments and hotel units atop Block 37, 108 N. State.
Mr. Vance, whose firm handles retail leasing at the property, declined to comment on Block 37.
New leases announced last year included a unit of Bonn, Germany-based Vapiano S.E.’s deal for 5,700 square feet at Monroe Street and Wabash Avenue, its second location in Chicago.
Two business school students took 1,925 square feet for an Indian-style “fast casual” restaurant at 28 S. Clinton St., and restaurateur Roger Greenfield drew up plans for a two-level eatery at 318 S. Michigan St., a small condo-conversion project.
Shoe seller Universal Sole leased 2,200 square feet in the Lakeshore East development while sandwich chain Pret a Manger leased a 2,300-square-foot space near Millennium Park.
The Loop retail market also saw two major store openings last year.
In January 2012, Deerfield-based Walgreen Co. debuted its 27,000-square-foot flagship-style store at 151 N. State.
Six months later, Minneapolis-based Target Corp. opened its 125,000-square-foot location in the former Carson Pirie Scott store at 1 S. State St.
This story has been corrected to reflect that Specialty’s Café & Bakery renewed its lease at 191 N. Wacker.