Retail vacancy rate falls for first time in 3 years

(Crain's) — The vacancy rate for local retail real estate fell for the first time in three years, a glimmer of hope for landlords battered by the recession.

The amount of vacant space in local shopping centers and strip malls slipped to 11.9% during the second quarter, compared to 12.1% during first quarter and 11.0% during the first quarter, 2009, according to a new report by CB Richard Ellis Inc.

The slight decline was the first time the vacancy rate has fallen since the second quarter, 2007, when the rate dropped 0.2 percentage points, to 7.51%, almost the lowest level of the last decade.

Any decline in vacancy is welcome news in a market that has suffered from overbuilding in the far outlying suburbs, followed by wave upon wave of store closings. Now, building owners who have endured this difficult time face a new challenge: waiting out the recovery.

"We have to be careful about celebrating too early," says Wendell Hollan Jr., a first vice-president in the retail services group of CB Richard Ellis. "We have reached equilibrium, but it will be a slow climb back."

Another measure of the retail real estate market also improved.

Average asking rents rose 31 cents, to $16.13 a square foot, during the second quarter, compared to the first quarter. Rents have risen in three of the last four quarters, but are still down 31% from their recent peak of $23.53 two years ago.

With demand for space improving, the vacancy is now likely to fall, Mr. Hollan predicts.

Yet any recovery is likely to be uninspiring. Those retailers who are expanding are a lackluster mix of discount apparel retailers, auto parts stores and fast-food chains.

Bargain hunters include not only consumers, but opportunistic retailers who are scouring the market for locations where they can stretch their rent dollars, observers say.

"Most of them (retailers) are looking to take advantage of second-generation space, and move up to locations that they couldn't otherwise afford two years ago," says David Dresdner, a principal with Northbrook-based Mosaic Properties & Development LLC, which paid about $24 million for a grocery-anchored center in South Elgin, in a distressed sale.

In a boost to the local real estate market, Wal-Mart Stores Inc. on June 21 pledged to build several dozen stores in the city over five years.

Related story: City Council approves city's 2nd Wal-Mart

Some of the stores could be as small as 20,000 square feet, Mayor Richard Daley said last month, according to the Chicago Sun-Times.

In addition to the Pullman location, which received zoning approval late last month, the Arkansas-based retail giant is also expected to get approval soon for a store in Chatham to go with the company's first Chicago location, which opened in Austin in 2006.

But Wal-Mart rival Target Corp. already has 10 stores in the city, with another to open in the Wilson Yard development in Uptown. And many observers expect Minneapolis-based Target to counter Wal-Mart's move by increasing its presence here.

"I cannot imagine that those folks want to lose market share, with the plans that have been published now by Wal-Mart," Mr. Hollan says.

The city already has among the lowest vacancy rates in the dozen submarkets tracked by CB Richard Ellis.

—The vacancy rate on the North Side fell to 6.5% during the second quarter, compared to 7.2% during the first quarter and 6.3% during the second quarter, 2009. The North Side has the lowest vacancy in the Chicago area.

—The vacancy rate on the South Side fell to 10.8% during the second quarter, compared to 12.3% during the first quarter and 9.5% during the second quarter, 2009. The South Side has the third lowest vacancy in the Chicago area.

Vacancy was highest in the South Suburbs, where the rate rose to 21.5% during the second quarter, compared to 20.3% during the first quarter and 17.9% during the second quarter, 2009. The second highest vacancy was Kane County, where the rate rose to 18.0% during the second quarter, compared to 17.6% during the first quarter and 17.7% during the second quarter, 2009.

Far outlying suburbs, such as Antioch, Yorkville and New Lenox, face particularly tough challenges.

"We need to see a resurgence in residential expansion before those markets come back," Mr. Hollan says.

In the latest reminder of how slow any recovery is likely to be, the University of Michigan's consumer sentiment index fell 9.5 points in June, to 66.5, its lowest level since last August. Before the recession began in 2007, the measure was above 100.

"There is a pent up demand with consumers, they have delayed purchases for a significant period of time, and hopefully that will be a good thing for retailers," he says.