Chicago’s retail sector stands at a crossroads, navigating unprecedented challenges while harnessing newfound opportunities for growth. By embracing innovation, fostering collaboration and leveraging data-driven insights, investors and developers can chart a course toward a resilient and vibrant retail ecosystem, poised to thrive in the post-pandemic era.
The heart of Midwest commerce, Chicago is a bellwether for economic trends both locally and globally. In recent years, however, the retail market has faced unprecedented challenges. As we rapidly approach the halfway point of 2024, it’s crucial to dissect the dynamics shaping Chicago’s retail landscape to forge ahead.
In 2023, the Chicago Loop, renowned for its vibrant retail scene, encountered a sobering milestone: its highest retail vacancy rate on record, soaring past 30 percent. This surge reflects a broader global trend, with major urban centers grappling with increased vacancies amid the pandemic’s fallout.
Behind this phenomenon lies a complex interplay of factors. Chief among them is the correlation between retail and office vacancies. Historically, fluctuations in office vacancies have mirrored shifts in retail, a pattern evident in cities in Chicago, as well as other metro areas such as Toronto and London. However, the current surge in vacancies is unique, decoupled from traditional drivers like company downsizing. Instead, it underscores a fundamental shift in work patterns, with remote and hybrid models reducing foot traffic in urban cores.
Despite these challenges, Chicago’s retail market has exhibited remarkable resilience. Demand formation, measured by the absorption of retail space, soared in 2023, marking its 10th consecutive positive quarter, according to analysis by Zach Geller, associate research director at Lee & Associates.
“Demand for retail space rose by almost 4 million square feet by 2023’s year end,” he said, adding that that reflected a diverse array of users seeking retail space.
Projections for 2024 paint a nuanced picture of Chicago’s retail landscape. Employment is expected to continue its upward trajectory with local firms adding 30,000 new positions. Construction activity will see a modest uptick, yet deliveries are poised to outpace net absorption, leading to a continued rise in vacancy rates.
Rent growth, while expected to improve compared to the previous year, falls below the prior 10-year average. The average asking rent is forecast to reach $19.05 per square foot, reflecting cautious optimism tempered by lingering economic uncertainties.
The key to survival lies in adopting proactive strategies to thrive in uncertainty. Embracing digital transformation is paramount, as the pandemic has accelerated the shift towards online shopping. Retailers, experts agree, must leverage the emergence of AI technology and the redesign of existing spaces to meet evolving needs. AI enables retailers to analyze and customize the customer experience while optimizing operations behind the scenes. Concurrently, the redesign and reuse of structures reflect the surge in demand by new and diverse retailers, showcasing peak creativity in the business of retail.
For example, Unibail-Rodamco-Westfield (URW) has unveiled plans for the redevelopment of Westfield Old Orchard, a shopping center in Chicago’s North Shore area. This transformation aims to create a unique destination blending retail, dining, entertainment, wellness amenities and luxury residences, all complemented by open green spaces and outdoor lounges. Slated to break ground in 2025, it is expected to begin welcoming residents in 2027.
Fostering collaboration between retail and office sectors is also critical. Recognizing the symbiotic relationship between foot traffic and retail leasing, efforts to revitalize urban cores and incentivize in-person engagement are pivotal. Flexible lease structures and innovative retail concepts can help breathe new life into vacant storefronts, driving foot traffic and revitalizing communities.
Moreover, a data-driven approach to decision-making is indispensable. By harnessing insights from market analytics and consumer behavior trends, stakeholders can identify emerging opportunities and mitigate risks proactively.