As most of the United States enjoyed an expanding economy over the past five years, the Midwest has suffered devastating job losses — more than 500,000 manufacturing jobs compounded by a mass exodus of more than 300,000 residents in search of warmer weather year-round. The Rust Belt states of Michigan and Ohio also weighed down Midwestern states including Indiana, Illinois, Minnesota and Wisconsin.
However, there are a few cities across the Midwest boasting healthy economies: Chicago, Minneapolis and Columbus, Ohio, recorded robust job and population growth. Economy.com forecasts the cyclical manufacturing downturn in the Midwest may be nearing its end.
“Unless another sizable round of layoffs hits the auto industry, the Midwest will be buoyed by vibrant export markets and a rebuilding of inventories for industrial equipment and machinery,” says Steve Cochrane, an economist with Economy.com. “Investment in ethanol production capacity and rising commodity prices add further support for the Midwest economy.”
But first, the Midwest still has to work its way through the housing slump. New home starts have slowed to a trickle and default and foreclosure pains are especially acute in Indiana, Michigan and Ohio according to the Mortgage Bankers Associates (MBA) and Foreclosures.com. Indiana, Michigan and Ohio have experienced less home price appreciation than other parts of the Midwest, exacerbated by their lackluster labor markets. And, sales of existing homes in Michigan have been declining for two years, according to the Michigan Association of Realtors.
Existing home sales in the state fell 11 percent for the 12 months ended June 2007 compared with the same period a year ago. Similarly, the Ohio Association of Realtors reported 136,300 existing home sales for the year ended June 2007, 6 percent below the 145,600 homes sold during the 12 months ended June 2006.
In response, retailers have scaled back their expansion plans in the Midwest, which has made it more difficult for developers and owners to secure tenants.
Michigan's pull
Over the past decade, the Midwest economy has trailed the nation's with Michigan and Ohio at or near the bottom. “Michigan is having the worst performance of any state in the country,” says Bill Strauss, an economist with the Federal Reserve Bank of Chicago. “If what is happening in Michigan spread to the rest of the nation, we would be in a very severe recession.” While the U.S. economy experienced 47 consecutive months of job growth, Michigan lost 423,000 jobs during the period; about one of every 11 jobs. “That's not a trivial loss,” says Strauss.
Of the worst performing metro markets in the U.S., seven of the ten are in Michigan or Ohio, illustrative of the weakness in the industrial Midwest economy, according to Economy.com. The Detroit metro area, along with Dayton, Ohio, and Cleveland are at the bottom, and conditions have deteriorated during the past year.
Manufacturing activity in August throughout the Midwest was relatively unchanged, at 53.8 compared with the 53.4 in July, according to the Chicago Purchasing Managers Index. (A reading of 50 or higher is considered to reflect expansion.) The slight improvement is encouraging since it suggests businesses are not retrenching in the wake of tighter financial conditions and increased equity-market volatility. Economists predict improvement during the fourth quarter.
The Federal Reserve Beige Book says foreclosures grew in every state in the Midwest except Illinois. During the second quarter, one percent of all mortgages in Michigan had foreclosure actions started, according to MBA's National Delinquency Survey.
Michigan has the highest number of homes taken by foreclosure with 9.4 foreclosures for every 1,000 households. Indiana's foreclosure rate is 7.8 for every 1,000 households. In Ohio, the percentage of mortgages 90 days or more past due or in foreclosure is more than twice the national average; 9 foreclosures per every 1,000 households, according to Foreclosures.com.
Despite the somber housing environment, the Michigan Retail Index, a joint project of Michigan Retailers Association (MRA) and the Federal Reserve Bank of Chicago, showed the retail industry posted its first three-month period ended July 2007 of positive sales performance since early 2004. The index reported 46 percent of retailers realized increased sales over the same period last year while 32 percent recorded a decline and 13 percent saw no change.
While Michigan's prognosis doesn't look good, it's not on life support.
“Are things great? No, they're not,” says Jim Fielder, vice president of Robert B. Aikens & Associates LLC, a Birmingham, Mich.-based retail developer. “But they're a heck of a lot better than you would think given how much negative press we've received. If Michigan's retail market is such a disaster, you'd think that people would just be cutting things off right now.”
Instead, Fielder points to ongoing retail development that features major retailers such as Target, Wal-Mart and JCPenney.
Aikens is developing a lifestyle center project in Grand Rapids, Mich. And, this month Taubman Centers Inc. plans to open the Mall at Partridge Creek in Clinton Township, Mich., a 640,000-square-foot open-air center anchored by Nordstrom, Parisian, and a 14-screen movie theater.
Chicago winds
Michigan aside, many Midwestern states saw robust employment, says Strauss. The employment level in the Midwest was stable during the second quarter of 2007; nonfarm employment grew by 41,000 jobs in July 2007, up 0.1 percent from the same period a year ago, according to Economy.com. During that same 12-month period, Michigan's job rate grew a bit more — 0.6 percent — with 165,000 jobs created.
Over the past year, every state in the Midwest recorded job growth except Michigan and Ohio. Despite the gains, the unemployment rate for the region rose to 5.6 percent from 5.1 percent. Unemployment in Midwestern states varied from 4.5 percent in Minnesota to 7.2 percent in Michigan.
Average nonagricultural employment in the Chicago area was up 0.9 percent year-over-year in June, according to the Bureau of Labor Statistics. The seasonally unadjusted unemployment rate for the metro area was 5.5 percent in July, up from 4.7 percent a year ago.
The area's strong housing market has fueled retailers over the past four years as they follow rooftops. Every year, the market added an average of 33,000 new units, says John C. Melaniphy III, vice president of Mid-America Development Partners LLC, an Oak Brook, Ill.-based retail developer and owner. Suburban communities including: Plainfield, Joliet, Yorkville, Oswego, Lockport, New Lenox, Naperville, North Aurora, Huntley, Elgin, Pingree Grove and Woodstock have experienced significant growth in both housing and retail.
Wal-Mart is expanding in these communities with its Supercenter format, while conventional supermarkets like Jewel-Osco are developing stores alongside home improvement retailers Home Depot and Lowe's. This year alone, more than 12 million square feet of retail space is slated to break ground, according to Melaniphy. Another 12.9 million square feet is to come on-line in 2008. That's a huge jump over the past 10 years when the metro area added between 4 million and 6 million square feet annually.
All this new retail has pushed retail sales in Chicagoland to more than $100 billion per year, according to the Illinois Department of Revenue. Mid-America Development Partners, in partnership with Chicago, Ill.-based Harlem-Irving Companies, is developing Kendall Marketplace in Yorkville, Ill., a 800,000-square-foot power center.
“Yorkville has witnessed significant housing growth in recent years and Kendall County is the third fastest-growing county in the nation,” says Melaniphy, adding 12,000 new residences are to be built within a three-mile radius of Kendall Marketplace.
However, in July, building permits fell 25 percent to 19,400 and the Chicago Association of Realtors reported existing home sales in Chicagoland dropped 19 percent to 108,000 houses in June 2007
“Retailers are telling us they're worried about the household forecasts, and big-box retailers indicate they're going to hold off on [greenfield] locations and are really turning inward to more densely populated areas in Chicago,” Melaniphy says.
Chicago stats
Neighborhood center nonanchor asking rent: $17.96
Asking rent growth in 2007: 0.8%
Vacancy rate: 8.7%
Community center nonanchor asking rent: $20.19
Asking rent growth in 2007: 0.8%
Vacancy rate: 6.8%
Source: REIS
Detroit stats
Neighborhood center nonanchor asking rent: $16.04
Asking rent growth in 2007: 0.3%
Vacancy rate: 10.7%
Community center nonanchor asking rent: $18.27
Asking rent growth in 2007: 0.5%
Vacancy rate: 8.4%
Source: REIS
Projects under development
THE SHOPS AT THE POLO CLUB in Plainfield, Ill., is a 610,000-square-foot lifestyle center being developed by Poag & McEwen, headquartered in Memphis, Tenn. The project will be anchored by Von Maur department store and a collection of lifestyle shops and specialty retailers. The announced tenants include Chico's, Coldwater Creek, Ann Taylor, Talbots, Restoration Hardware, Williams-Sonoma, and J Jill, among many others. The project is expected to open in 2009 at the northeast corner of Route 59 and 119th Street. The Plainfield Village Board approved a $16.5 million incentive agreement, which will help pay for infrastructure around the site. Plainfield is the oldest and fastest growing community in Will County.
THE VILLAGE GREEN is a 447,000-square-foot mixed-use development consisting of lifestyle retailers and multistory residences located on 190 acres at Routes 45 and 132 in Lindenhurst, Ill. The $130 million project is being developed by OliverMcMillian, based in San Diego, Calif., and is scheduled to open in spring 2009. Lindenhurst's population is expected to grow to 19,843 by 2030 up from 12,539 in 2000. There are approximately 200,000 residents within a 15-minute drive who are not served by an upscale regional shopping center.
Proposed projects
FOREST CITY, based in Cleveland, Ohio, has a 2-million-square-foot regional mall/lifestyle center/power town proposed for 225 acres at I-355 and Route 6 in New Lenox, Ill. It also has a one-million -square-foot lifestyle center planned in Sugar Grove at Route 47 and Galena Road. Zaremba has a 500,000-square-foot power center planned on the south side of Route 6 at Interstate 355.