September 27, 2006

State Street A Great Street For Retail Real Estate Surge

by Susan Diesenhouse

State Street might have been jolted by Macy's replacing Marshall Field's and the imminent departure of old stalwart Carson Pirie Scott, but that hasn't spoiled the performance of its retail real estate.

A strong demand for retail space has lifted rental rates about 10 percent in the past 12 months, observers said.

"Rents are rising so rapidly, it's almost a little scary," said Stanley Nitzberg, a principal of retail specialist Mid-America Real Estate Group, based in Oakbrook Terrace.

For retail stores with less than 3,000 square feet, asking rents range from about $100 to $150 a square foot a year. In 2005, they ranged from about $88 to $110 a square foot, said Nitzberg, whose firm owns several properties on State Street.

Vacancy rates might register in the 3 percent to 5 percent range, close to where they were a year ago, but Nitzberg said space seems scarcer than those numbers would indicate. He believes the vacancy rate "is close to zero."

Demand for space is being propelled by a solid performance from the street's retailers.

"In the stores, sales volume is terrific," said Nitzberg, who estimates that many retailers racked up double-digit sales growth in each of the last two years. "Merchants want to be there."

Business is good compared with how it was just a few years ago and also compared with other cities around the country, said Dennis Shubert, real estate economist for Property & Portfolio Research, a real estate research firm in Boston that is a subsidiary of London-based DMGI.

"Downtown is so solid because in retail it's bodies times dollars," Shubert said. "Chicago has a large population that makes good money, plus tourists, which adds up to a great retail scene."

Retailing throughout the region is more buoyant than it is nationally. While higher interest rates and slowing sales have dampened retail performance around the country, the Chicago market is still strengthening.

As a result, the retail vacancy rate in the metropolitan area is about 7 percent, more than 2 percentage points lower than a year earlier, and it is poised to continue improving throughout the year, Shubert said. Rents, meanwhile, rose 6.1 percent in the past year, Property & Portfolio Research reports.

"On State Street, retail momentum is growing" and heading toward the south end of the street, Shubert said.

That demand is pushing up the price of retail properties sold throughout the metropolitan region. For the 12 months through September, 91 properties were sold for a total of $1.7 billion. Only Washington and Los Angeles ranked higher than the Chicago region in total investment volume.

Prices here averaged $206 a square foot, better than the national average of $158 a square foot. That also is better than the previous 12-month period, when the average square-foot price for properties sold was $161, according to Real Capital Analytics Inc. in New York.

Investors are paying more for higher-quality assets with strong occupancy and rental rates.

On State Street, the lure for retailers is the influx of students and new residents and the anticipation of more to come, said Sharon Kahan, vice president of retail for CB Richard Ellis. Also, 2-year-old Millennium Park pulls hordes of sightseers into the Loop, she said.

"On any given weekday, foot traffic on State Street compares favorably with North Michigan Avenue," she said.

A few years ago, State Street vacancy rates ballooned into the 20 percent realm. Back then, rents were about half their current rate, Kahan said.

Also, noted Nitzberg, there are more stores on the street that appeal to shoppers.

"There's now a critical mass of stores that make shoppers want to walk over," he said.