It's time to move back to the city. That's the conclusion that many national and local retailers seem to be drawing about Chicago. There, firms have responded to the downturn by reining in expansion plans in the suburbs in favor of pursuing urban locations that have opened up in Chicago's Loop and North Side neighborhoods.

The interest from retailers can be summed up in two words: density and dollars. Despite the downturn, the Loop and North Side neighborhoods continue to attract residents, employees and tourists, all of whom generate a steady flow of foot traffic, says Gary DeClark, managing director of Integra Realty Resources based in Chicago. Throw in the roughly $81,000 in disposable income per household in the city's urban core and it's a combination that's tough to beat.

Apple, for example, recently inked a 10-year ground lease to build a 15,000-square-foot standalone store in the Clybourn Corridor, a patch of retail that caters to affluent residents of the Lincoln Park and Gold Coast neighborhoods. The company took advantage of rising vacancies that have driven retail sites to about $60 per square foot, similar to what spaces fetch in the Loop and down 8 percent to 10 percent from the market's peak, notes Greg Kirsch, principal of Newmark Knight Frank's Chicago retail group.

Whole Foods also has chosen Clybourn Corridor as the site for its third largest store — a 75,000-square-foot behemoth on Kingsbury. Even retailers that traditionally prefer lower-income, suburban sites have been tempted. Discounter Aldi Inc., for example, snatched a 16,000-square-foot space vacated by Bombay Furniture.

The trend is replicated throughout the city. Other retailers planning to open within city limits include West Elm and luxury brands Swarovski and Baccarat. Restaurant chains are in the mix as well, including Wich Wich, a sandwich concept new to the Chicago market, and Qdoba Mexican Grill, which has leased three Loop locations. And Target has committed to an 180,000-square-foot, two-level store at Wilson Yards Shopping Center on the city's north side.

Outperforming the suburbs

Chicago vacancies rose to 11.6 percent in the second quarter, up from 11.0 percent in the first quarter, reports CB Richard Ellis. Net asking lease rates dropped to $15.95 per square foot from $16.40 in the first quarter. Yet, the picture is brighter within city limits. The City North submarket, which CBRE defines as the Loop and Chicago's inner neighborhoods, posted the lowest vacancy rate in the region at 6.3 percent. It also had the highest rents, ranging from $22.74 per square foot to $27.21 per square foot.

Still, Chicago has faced its share of adversity. Consider Armitage Avenue, a tony strip of boutiques and upscale restaurants on Chicago's North side. A year ago, there were few vacancies. Today there are at least seven empty spots, says Shannon Hormanski, an associate director of Chicagoland Retail Services for Cushman & Wakefield of Illinois.

By and large, retailers have jumped at the chance to leave suburban locations and relocate within the city in “areas that they have not been able to get into before,” says Stan Bobowski, president of Bobowski & Associates Inc., Chicago-based retail brokerage firm. Other retailers that already had a presence within the city are also upgrading their locations and eying formerly pricier areas.

As a result, retail leasing activity in the Loop and near North neighborhoods, while not frenetic, continues to be lively, according to John Vance, vice president of the Chicago-based brokerage firm. Even so-so locations within the city are generating interest, especially if owners have dropped their rental rates to make it more affordable for retailers to operate.

The Magnificent Mile — a stretch of Michigan Avenue north of the Chicago River — remains Chicago's premier retail district. It too has been nicked by closures and the vacancy rate is approaching 10 percent. That has offered expanding retailers an opportunity to grab prime space at discounted rates. Rents on the Magnificent Mile traditionally exceed $300 per square foot, but have dropped as much as 20 percent over the past year.

Borders Books & Music, for example, will close its 55,000-square foot store in 2010. Bankrupt retailer CompUSA also closed its store nearby. Meanwhile, Best Buy has opened a 22,000-square-foot store in the John Hancock Building on the strip and a former Bennigan's has been leased to Sweet Water Tavern & Grille.

The American Girl Place recently moved from 111 E. Chicago Ave to a 52,000-square-foot spot at Water Tower Place. And Spanish apparel chain Zara plans to open a 33,000-square-foot store at Chicago Place.

Star of the city

Amid the downturn, one area has experienced rental rate increases. The area south of the river along Michigan Avenue has seen rental rates double over the past several months with some deals reaching $100 per square foot or more.

“Millennium Park is a huge traffic driver, pulling people south along Michigan Avenue,” Kirsch says. The area attracts its regular business lunch crowd, as well as local shoppers and tourists.

A number of residential projects have opened and new commercial tenants include a local art gallery called Arts and Artisans, Noodles & Co.'s first urban restaurant, and Clearwire Corp.'s first Chicago store. The wireless Internet provider, which signed a long-term lease for 2,700 square feet at 180 N. Michigan Ave., has chosen mall locations in other markets, says Kirsch, who represents the Kirkland, Wash.-based company. Foot traffic near Millennium Park drew the company to Michigan Avenue.

Ongoing development

While development has slowed considerably in suburban Chicago, developers continue to move forward with 1.1 million square feet of new retail space in the City North submarket, reports CBRE. Joseph Freed & Associates, for example, is nearing completion on its Block 37 project, located at 108 N. State Street.

The mixed-use project, which features 280,000 square feet of retail space, is scheduled to open in November. Freed has signed leases with a number of retailers that prefer urban locales, Vance notes. Puma will debut a new format, the first U.S. store to carry its entire line of apparel, shoes and accessories. It will be joined by anthropologie, Zara, Aveda Salon & Spa, Rosa Mexicano restaurant, Bigsby & Kruthers and Swarovski.

Similarly, local developer Structured Development LLC is moving forward with New City, a 1 million-square-foot project in the Clybourn Corridor that will include 400,000 square feet of street-front retail, a 196-unit luxury apartment tower and parking for 1,050 cars. The firm has signed a lease with Milwaukee-based Roundy's Inc. to anchor the project with an 80,000-square-foot European-style grocery store.

Jeff Berta, senior director of development with Structured Development, says the firm plans to break ground on the project in mid-2010. The developer is still leasing Blackhawk on Halsted, a 225,000-square-foot mixed-use development. The retail portion of the project is anchored by outdoor retailer REI, which occupies 32,000 square feet.

Berta says the project has experienced a decline in leasing activity for retail space, leaving about 49,000 square feet vacant. As a result, the firm has become a “bit more aggressive” with its rental rates to fill the remaining space.

“Ultimately, I believe the urban market is still strong in Chicago,” Berta says. “Even though retailers are focusing on fewer locations, there are still deals to be done in the city.”

A longer version of this article appears at retailtrafficmag.com/features.