Windy City's retail downdraft

Chicago faces the worst slump in retailing growth in at least a decade - and residents of the Windy City and its suburbs are paying the price in the form of lost tax revenue for improvements and services.

And because Chicago, the nation's third-largest metropolitan area, is a bellwether of the retail industry, the downturn is a harbinger for other major metropolitan areas.

"This is a very challenging environment," said Mike Jaffe, a Chicago-area retail developer and president of Jaffe Companies. He added that when new retail growth stalls in a metro area the size of Chicago, "that's really saying something."

One example of the situation can be found 36 miles southwest of The Loop, in the village of New Lenox, where there was plenty of excitement among the 25,000 residents about two new malls on the way.

One of the malls - the 1 million-square-foot Cedar Crossings shopping center - is slated to open later this year.

But the second, a 1.2 million-square-foot center developed by Forest City Enterprises that was expected to open in 2010, has "run into issues," according to New Lenox mayor Tim Balderman.

"The landowner wanted more money. Now we're not moving forward. We're very disappointed," he said. "There's no doubt that this economy has hurt us."

The two centers collectively were projected to generate as much as $10 million in property and sales tax revenue annually.

That money would have gone to building and maintaining surrounding infrastructure.

"Illinois hasn't passed a capital improvement bill in years," Balderman said. "So the burden falls on us to find the money for maintaining our roads."

But not all of the $10 million would go to roads.

"I am most disappointed about the jobs these [retail] projects would have created," he said, adding that he's been proud of the fact that he hasn't - as yet- been forced to lay off any employees.

"These are temporary construction work and permanent store jobs that people really need right now," he said.

According to Balderman and others, the situation in New Lenox is being played out in numerous cities and suburbs across Chicago.

Jaffe said the suburbs of Chicago, especially those with greater exposure to the subprime crisis, have seen a bigger downturn in retailing than the more conservative, upper income neighborhoods.

Still, Jaffe, who co-developed The Arboretum of South Barrington, a 600,000 square foot mixed use retail space in an affluent northwest Chicago suburb, said the "pain" is being felt in every area.

He said the Arboretum is 80% occupied. "Normally retailers will be knocking down the door for the last 20% of available space in this kind of location," he said.

Not this time.
Why Chicago matters

"There's no [retail] growth happening anywhere," said Andy Bulson, vice president with Mid-American Real Estate, a retail brokerage firm based in Oakbrook Terrace, Illinois. "Everyone has hit the brakes."

This is significant because Chicago is the third-largest retailing market in the United States, based on population, after New York and Los Angeles.

Marshal Cohen, chief retail analyst with the NPD Group, explained that Chicago historically has evolved as a major hub of the Midwest.

"In the Midwest you don't have many epicenters for shopping. So Chicago's draw is that it pulls people from surrounding areas," said Cohen.

He explained that Chicago has become a shopping Mecca for conservative Midwesterners and folks who live in the South for whom New York is too expensive and Los Angeles a little too "freespirtited."

Chicago's other allure for merchants and mall developers is its proximity to Canada, Cohen said.

"Chicago attracts a tremendous amount of immigration dollars when the dollar is weak," he said. "Many people travel from Toronto to do their shopping in Chicago."

So if no new shopping centers are being built, that's vital future revenue that's lost for Chicago's economy.

"The slowing of the U.S. economy has finally cooled Chicago's robust shopping center development [growth]," Bulson's firm said in its annual survey.

The report showed that new gross leaseable area (GLA), which refers to the total floor space dedicated for retail usage such as a shopping center, power center or lifestyle mall, fell 50% in 2008 over 2007.

The projection for 2009 for the Chicago area is for another 22% drop in shopping center growth.

What's more, the longer the recession lasts, the greater the likelihood that a similar erosion of new retailing activity will quickly spread to other major cities across the country, warned Bulson.

And citing New Lenox's example, Bulson said it is the smaller suburban residential towns outlying these larger cities that are less able to withstand the loss of vital retail revenue and new jobs growth.

Bulson said he's familiar with a number of Chicago-area suburbs where developers have "backed out" of deals to construct large malls.

These developers are either not getting interest from retailers - many of whom are shrinking their store base instead of expanding it - or struggling to get financing for these projects in light of the credit market lockdown, he said.
Shopping center slump

In Chicago, Bulson said "a lot" of new projects need to be finalized in the first quarter, or the estimates for decline in new store growth could be even lower.

Macro-level issues facing retailers such as shrinking margins, lower same-store sales and debt and financing problems will lower new store development for every retailer, he said.

He provided a snapshot of chain stores that have already curtailed their expansion plans in the Windy City.

Target (TGT, Fortune 500), the No. 2 discounter after Wal-Mart (WMT, Fortune 500), has "pulled back on multiple deals around metro Chicago," he said.

At the same time, he estimates that Wal-Mart (WMT, Fortune 500), whose sales have been energized in recent months as more consumers trade down in their everyday purchases, could open as many as seven new supercenters around Chicago.

Home improvement chain Home Depot (HD, Fortune 500) closed its regional office in Chicago last year and will "very likely not open a single new store in coming years," he said.

Among department stores, he said Kohl's could open four new Chicago-area stores this year but J.C. Penney's "future plans appear to be unclear at this time."

Regarding shopping centers, he expects to see a "continued decline" this year.

Even with this gloomy scenario surrounding Chicago, NPD's Cohen sees a bright spot.

"I look at all this as a good sign," Cohen said. "The last place where the recession surfaces is in retailing and retail development."

He pointed out that retail sales didn't see a sizeable slump until the fall of 2008, almost a year after the recession was "officially" said to have started in December 2007.

"Finally, retailing has caught up to the rest of the economy and things will start to pick up again in this industry by the second half of 2009," Cohen said.