Empty Space Means Big Opportunity

(Crain’s) — The vacancy rate for Chicago-area retail real estate shot up during the second quarter to its highest level in nearly five years, and is expected to continue to climb this year as merchants retreat.
Amid an increasingly harsh economy, the vacancy rate climbed to 8.65% during the second quarter, compared to 7.93% during the first quarter and 7.51% during the second quarter of 2007, according to a report by CB Richard Ellis Inc.
The vacancy rate hasn’t been this bad since the third quarter of 2003, when it was 9.19%.
CB Richard Ellis says the vacancy will continue to rise this year at a slower rate, but does not predict how high. The rapid rise in vacancy can’t be blamed on developers, because the total amount of space remained unchanged during the quarter. Instead, the escalating rate is largely the result of store closings during the quarter by retailers such as Linens 'n Things and Sharper Image.
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“Doom and gloom is not my nature,” says Sharon Kahan, a first vice-president with CB Richard Ellis’ retail brokerage group. But “everyone realizes that we still have some tough times ahead of us.”
Last week, trendy discount apparel retailer Steve & Barry’s filed for Chapter 11 bankruptcy protection and is expected to liquidate. The Port Washington, N.Y.-based company has about a dozen stores in the Chicago area, including one planned for Evanston.
The 0.72-percentage-point jump in vacancy is the largest quarterly increase since the fourth quarter of 2002, when the rate soared more than a percentage point, to 11.13%, the highest level since at least 1994.
Chicago developer Robert Bond offers a particularly bleak assessment of the local retail real estate market, particularly if oil prices continue to rise.
“This economic morass we are in will continue past 2009, and hopefully start turning around in 2010,” says Mr. Bond, president of Chicago-based Bond Cos.
In addition to weakened retailers closing stores, even healthy retailers are slowing down their expansion plans.
For example, Walgreen Co., a driving force in retail real estate nationwide, said last week it plans to slow down expansion over the next three years.
The Deerfield-based drugstore company said it would add 365 stores during the 2011 fiscal year, 27% fewer than the 500 stores its expects to add during the current fiscal year, which ends Aug. 31.
And Plano, Texas-based J.C. Penney Co., said it plans to open just 20 stores nationwide in 2009, compared to 36 new or relocated stores in 2008. Penney’s opened five stores in the Chicago area in 2007.
The total amount of retail space rose just 0.63% during the second quarter, to about 124.2 million square feet.
The amount of space under construction slipped to 10.4 million square feet during the second quarter, compared to 10.7 million square feet during the previous quarter. Despite the slight decline, the amount of space under construction in 2008 is still well above recent historical averages of about 8 million square feet, the report says.
A joint venture led by Mr. Bond completed the only significant new shopping center during the second quarter: Springbrook Prairie Pavilion, a 270,000 square foot, two-stage lifestyle center in Naperville. Anchored by Austin, Texas, based-Whole Foods Market Inc., the center will be about 93% leased in October, when the second phase is completed, Mr. Bond says.
The vacancy rate rose in nine of the 12 Chicago-area submarkets during the second quarter, CB Richard Ellis says. The rate was the highest in Kane County, where it rose to 16.4% during the second quarter, compared to 14.81% during the first quarter.
Outlying retail centers that were banking on the suburban homebuilding boom are expected to face stiff challenges, Ms. Kahan says.
The vacancy rate is the lowest on the city’s North Side, falling to 3.99% in the second quarter, compared to 4.71% during first quarter.