Downtown growth's next wave?

Recovery may bring new wave of development By Thomas A. Corfman Tribune staff reporter Published April 20, 2005 The market for retail space along the Magnificent Mile is improving slightly after a two-year funk. The vacancy rate for smaller, specialty store space on North Michigan Avenue edged down to 6.9 percent from a year ago, when it reached 7.1 percent, the highest level since 1999, according to the annual survey by Northern Realty Group Ltd. And rents are rising again, after falling last year to their lowest level in more than a decade. This modest recovery may set the stage for a new period of leasing and development on Chicago's premier shopping strip. A new wave of European merchants is looking for space, and some existing Michigan Avenue retailers are dropping plans to cut back. The street is likely to see construction of at least one new luxury high-rise. And even the troubled vertical mall, Chicago Place, is under new, more aggressive ownership. "We've had the war, we've had the recession, we've had high oil prices," said Michael Shields, an executive vice president with Northern Realty. "I don't see anything beyond that trilogy that's going to have any impact as large as those." Yet several factors could complicate the street's rebound. Retailers could slow expansion plans amid economic indicators showing that slowly rising interest rates and skyrocketing gas prices are forcing consumers to cut back spending. And the lineup of anchor retailers could change in the midst of unprecedented consolidation in the department store sector, creating the possibility of a large vacancy. Nonetheless, Michigan Avenue's vacancy rate has apparently topped out, though the street's biggest shakeup could follow Federated Department Stores Inc.'s acquisition later this year of May Department Stores Co. The deal would give Cincinnati-based Federated control over Lord & Taylor and Marshall Field's at Water Tower Place, 835 N. Michigan Ave. It already operates Bloomingdale's at 900 N. Michigan Ave. Some observers think that's one store too many. Adding to the uncertainty, rivals such as Neiman Marcus Group Inc. and Saks Inc. are both exploring strategic alternatives. "This is a degree of turmoil that no one has ever seen in department stores before, so I am not sure if anybody knows how to interpret it," Shields said. When Michigan Avenue's fully leased department stores are included, the vacancy rate slipped 1 percentage point, to 4.3 percent, over the last 12 months. In 2002, the total vacancy rate was just 1 percent. The Northern Realty survey includes buildings on North Michigan Avenue from Oak Street to the Chicago River. Only retail space with a street entrance or escalator access to the street level is included. A department store's defection could present an opportunity for new merchants. High-end European retailers traditionally make Chicago their third or fourth choice for U.S. expansion, after New York, Los Angeles and perhaps Miami. But Michigan Avenue has moved up in the pecking order, some retail real estate specialists say. "After New York, Chicago is the next stop for the Euros now," said Faith Hope Consolo, chairman of the retail division at New York's Prudential Douglas Elliman Real Estate. For example, representatives of Zara, a moderately priced fashion chain owned by Spain's Inditex Group, have recently been scouting Michigan Avenue for space for a new furnishings concept called Zara Home. The chain has 16 apparel stores in the U.S., though none in the Chicago area. At least one new luxury development could be started this year on Michigan Avenue, as the Fourth Presbyterian Church seeks zoning approval for a condominium development on a site behind the historic church. Although that project would not include retail space, the Terra Foundation for the Arts is evaluating proposals from several developers for a high-rise or midrise building that would replace the shuttered museum at 664 N. Michigan Ave. Among those who have made proposals is Chicago-based Prism Development Co., confirmed Donald Ratner, the foundation's executive vice president. Prism's plans do not include a hotel, he added. Sometime this summer, Terra expects to either reach an agreement with a developer or decide to conduct its own redevelopment, which would add about 40,000 square feet of space on four levels. Strategic Hotel Capital Inc. is also considering a retail redevelopment of the InterContinental Chicago hotel, 505 N. Michigan Ave., which it purchased earlier this month. But Wm. Wrigley Jr. Co. has seemingly dropped plans to add a shopping plaza to the street level of its namesake building. Although street-level stores can command rents of more than $300 a square foot, difficulties in renting out upper-floor space helped drag the average rent down. Landlords have raised average asking rents 7 percent, to $37.28 a square foot, compared with a year ago, when rents hit their lowest level since 1993. Average asking rents were $128.42 a square foot in 2001, the highest level since Northern began the survey in 1991. But in a hopeful sign, several Michigan Avenue retailers that a year ago were quietly marketing some or all of their space have stopped doing so, and now apparently plan to fully use their space. They include fashion house Escada AG, 840 N. Michigan Ave.; computer superstore CompUSA Inc., 101 E. Chicago Ave.; and clothier Eddie Bauer, 600 N. Michigan Ave. Demand for retail space, as measured by net absorption, rose for the first time since 2002. Net absorption, the annual change in the amount of leased and occupied space, is nearly 5,500 square feet this year, compared with a negative 10,300 square feet in 2004, the study found. Of the 141,025 square feet of vacant retail space, less than 10 percent is on the street, a sign of the challenges that some vertical-mall landlords face. ---------- tcorfman@tribune.com ____________________________ so what kind european retailers do you expect to see? its not an upscale european retailer but i would like to see a celio they don't have a single store this side of the pond, if we could land the first one i think that would be awesome.>