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 difficult economic conditions, 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-Chicago. Throw in the roughly $81,000 in disposable income per household floating around Chicago’s urban core and you get 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 location in the Clybourn Corridor, a patch of retail that caters to affluent residents of the Lincoln Park and Gold Coast neighborhoods. The company, in part, took advantage of the kinds of vacancies cropping up when retailers including Z Gallerie and Pottery Barn shut stores. As a result, retail sites command around $60 per square foot—similar to what retail spaces fetch in the Loop and down between 8 percent and 10 percent from the market's peak, notes Greg Kirsch, principal of Newmark Knight Frank’s Chicago retail group.

Whole Foods also has stepped into the breach and chose Clybourn Corridor as the site for the third largest store in the company's portfolio—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, leased a 16,000-square-foot space vacated by Bombay Furniture.

The trend is replicated around the city. Other retailers planning to open within Chicago's city limits include West Elm and luxury brands such as 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. Even big box retailers such as Target and Kohl’s are rumored to be scouting for sites. So far, 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
Vacancies across the Chicagoland market have increased this year, growing to 11.6 percent at the end of the second quarter from 11 percent during the first quarter, according to CB Richard Ellis. Net asking lease rates dropped even further to $15.95 per square foot from $16.40 per square foot in the first quarter 2009. The picture is brighter, however, 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, that's not to say that Chicago hasn't faced its share of adversity, even if it is outperforming its suburbs. Consider Armitage Avenue, a tony strip of trendy boutiques and upscale restaurants on Chicago’s North side. Just 12 months ago, there were few vacancies. Today there are at least seven vacant spaces, according to Shannon Hormanski, an associate director of Chicagoland Retail Services for Cushman & Wakefield of Illinois Inc.

Yet by and large, retailers have taken advantage of the current conditions to vacate suburban locations and relocate within the city in “areas that they have been 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 in Chicago are also upgrading their locations.

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 dinged and affected by vacancies. But other retailers are taking advantage of newly discounted rents to score coveted slots. With all the shuffling, experts estimate the Michigan Avenue’s vacancy rate is approaching 10 percent, offering an opportunity for expanding retailers 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 12 months, according to local players.

Borders Books & Music, for example, will close its 55,000-square foot store (the largest in the chain) in 2010. Bankrupt retailer CompUSA also closed it store nearby. Meanwhile, additions to the strip include been Best Buy, which opened a 22,000-square-foot store in the John Hancock Building. And a former Bennigan’s space at 225 N. Michigan has been leased to Sweet Water Tavern & Grille.

The wildly popular American Girl Place also recently located, moving from a 40,000-square-foot location at 111 E. Chicago Ave to a 52,000-square-foot spot at Water Tower Place. Australia-based surfwear retailer Billabong joined American Girl with a 3,700-square-foot store at Water Tower and in the process made its Midwest debut. And Spanish apparel chain Zara, which has focused its Chicago expansion plans on urban sites, plans to open a 33,000-square-foot store at Chicago Place.

Star of the city
Some parts of the city are hanging in. But there is one area where rental rates are increasing. The area south of the river along Michigan Avenue between Wacker Drive and Washington Street just steps from Millennium Park has seen its rental rates double in the past several months with some deals having been inked for $100 per square foot or greater.

“Millennium Park is a huge traffic driver, pulling people south along Michigan Avenue,” Kirsch says. The area no longer attracts only a business-related lunch crowd, but a mix of local shoppers, business people and tourists.

Along with a number of residential projects such as Lakeshore East, new tenants include a local art gallery called Arts and Artisans, Noodles & Co.’s first urban restaurant, and Clearwire Corp.’s first Chicago store. The high-speed wireless Internet provider, which signed a long-term lease for 2,700 square feet at 180 N. Michigan Ave., has chosen mall locations for most of its stores in other markets, according to Kirsch, who represents the Kirkland, Wash.-based company. However, the foot traffic generated near Millennium Park compelled the company to open its doors on 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, according to 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 inked leases with a number of retailers that prefer urban locales, Vance notes. Puma, for example, will debut a new format that will be the first U.S. store to carry its entire line of apparel, shoes and accessories. There, it will be joined by anthropologie, Zara, Aveda Salon & Spa, Rosa Mexicano restaurant, Bigsby & Kruthers and Swarovski.

Similarly, local developer Structured Development LLC continues to move 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 already inked 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 real estate development with Structured Development, says he is negotiating with two other retail anchors—one that is new to Chicago and one that is expanding within the city. With city approvals expected before the end of 2009, the firm plans to break ground on the project in mid-2010.

In the meantime, Structured Development continues to lease its recently completed project, 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 its retail space, leaving about 49,000 square feet of retail space available. As a result, Structured Development 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.”

Olympic Opportunity

Along with Rio de Janeiro, Tokyo, and Madrid, Chicago wants to host the 2016 Summer Olympics. The Windy City continues to refine its plan to host the Games, which would place the city on the world stage and welcome more than 200 nations.

The City of Chicago has hosted a number of festivals, celebrations, and events including two world’s fairs and the 1959 Pan Am Games. It also hosted the Democratic National Convention in 1968 and 1996.

Although Chicago 2016's plan for the Games places the majority of the competition venues in the city’s parks, it also includes an Olympic Village that would cost about $1 billion to be built on the site of the old Michael Reese Hospital. The proposed site of the Village will become a mixed-income housing and retail community, with up to 30 percent affordable housing and will be developed regardless of whether Chicago hosts the Games, according to the Host City Committee.

According to a report commissioned by the Committee, the Olympic and Paralympic Games will generate $22.5 billion in economic development for Illinois over an 11-year period and create the equivalent of 315,000 full-time jobs for one year. More than half would be in Chicago and generate $7 billion in wages.

Chicago’s retail sector would likely benefit from the Games, expert say, but no one is sure to what degree.

Retailers that already have stores in the city will probably experience their best sales years, and the restaurant community will hit a “bonanza”, says Stan Bobowski, president of Bobowski & Associates Inc., Chicago-based retail brokerage firm.

However, Bobowski doubts the Olympics will compel many retailers to open stores in Chicago if they’ve never considered it before. “I just can’t see a lot of retailers signing multi-year leases just to take advantage of an event that lasts a few weeks,” he explains.

Shannon Hormanski, an associate director of Chicagoland Retail Services for Cushman & Wakefield of Illinois Inc., agrees: “I don’t think we’re going to have a huge surge in retail leasing or development just because of the Olympics—I don’t think there are Olympics chasers. But, the Olympics will push retailers that have been hemming and hawing about whether to open shop in Chicago to pull the trigger.”