Empty big-box stores drive up retail vacancy

By Eddie Baeb, May 11, 2009

(Crain’s) — The Chicago-area retail vacancy rate jumped to a six-year high of 11% in the first quarter, as more retailers closed stores amid rising joblessness and grim consumer sentiment.

The vacancy rate rose sharply from 10.2% in the fourth quarter and is up more than 3 percentage points from a year ago, when the rate stood at just 7.9%, according to CB Richard Ellis Inc.

The last time the vacancy rate was higher was the fourth quarter of 2002, when it stood at 11.1%.

Much of the recent rise in empty storefronts comes from big-box anchor stores that are 20,000 square feet or bigger. There are currently 227 such spaces available throughout the Chicago area, amounting to 10 million square feet.

Six chains, including now-defunct Circuit City, along with Linens ’n Things and Value City, account for 40% of the space.

The last time the market was deluged with big-box space was 2004, says Joe Parrott, a senior vice-president in CB Richard Ellis’s office in north suburban Bannockburn who represents landlords. Today’s situation is roughly twice the magnitude of ’04, when there were 102 anchor stores available totaling 5.9 million square feet, Mr. Parrott says.

Landlords of vacant big-box space face a perilous landscape today, as many of the retailers looking to fill such space are off-price merchants or local grocers — both likely to require low rent.

“A lot of landlords are going to be faced with hard decisions: ‘Do I take the low-paying bird in hand or do I wait and see what happens?’” Mr. Parrott says. “Everybody is a low-rent-paying tenant today.”

Last year, Mr. Parrott says, 1.9 million square feet of big-box space was leased in the Chicago market. At that rate, it would take five years to fill up the current vacancy if no more new space comes on the market, which is unlikely.

“I think the worst is behind us, but it’s not over,” Mr. Parrott says.

Recent economic news suggests that he may be right. On Friday, the stock market was encouraged by a Labor Department report that showed payrolls shrank by 539,000 in April compared with a loss of 699,000 jobs in March. The April jobs decline was the smallest monthly loss since October.

Also last week, the International Council of Shopping Centers (ICSC) reported that April sales at U.S. retail stores open at least a year rose 0.7% from April 2008. The group’s chief economist, Michael Niemira, downplayed the news, however, telling Reuters the monthly results demonstrated a move from “extreme weakness to moderate weakness.”

The ICSC holds its annual retail trade show in Las Vegas this weekend, on the heels of a big week for retail data. Titans Wal-Mart Stores Inc. and Macy’s Inc. are both to report first-quarter results this week. Meanwhile, the federal government reports April retail sales on Wednesday while preliminary consumer confidence figures for May are due out on Friday from Reuters/University of Michigan Surveys of Consumers.

In the Chicago area, retailers taking big-box space include the health club chain LA Fitness, which has recently opened 13 stores here, including a handful where the Irvine, Calif.-based chain took existing stores. Others new to the Chicago market and looking for big stores include discounters Famous Labels and Conway, Mr. Parrott says.

The largest big-box vacancy has come about from the failure of electronics retail giant Circuit City Inc., whose liquidation early this year led to 37 stores totaling more than 1 million square feet hitting the market.

So far, just two former Circuit City stores have been claimed: by local grocer Angelo Caputo’s Fresh Markets in Elmwood Park while a gymnastics club has leased the store in South Barrington.

A third location in Downers Grove is under contract to be sold and become a Binny’s Beverage Depot liquor store, according to media reports.

The six chains that account for 40% of the big-box anchor space available are:

• Circuit City: 35 spaces available, 1.1 million square feet.
• Value City: nine spaces available, 880,000 square feet.
• Linens ’n Things: 22 spaces available, 708,000 square feet.
• Wickes Furniture: 14 spaces available, 567,000 square feet.
• Expo Design Center: four spaces available, 400,000 square feet.
• Steve & Barry’s: 10 spaces available, 313,000 square feet.