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Premier Shopping Districts Are Particularly Vulnerable To Pandemic And May Need A Reset

Chicago’s Magnificent Mile is one of the nation’s top shopping districts, famous for its swanky shops, flagship stores and tourist attractions. But this year’s economic shocks further damaged several of its retailers, and the street’s already-high vacancy rate seems likely to keep climbing in 2020.

The sharpest recent blow was Canadian apparel retailer Roots’ late April decision to close seven U.S. stores, including an 11K SF flagship opened last May on two floors at 605 North Michigan Ave.

“That will certainly add a couple of percentage points to the vacancy rate,” Magnificent Mile Association CEO Kimberly Bares said. “The pandemic has certainly laid bare some retailers’ vulnerabilities and put them front and center.”

Premier Shopping Districts Are Particularly Vulnerable To Pandemic And May Need A Reset
Sephora, at 605 North Michigan Ave., getting ready for early June reopening.

Internet competition continues to gut many famous retail brands, and layering in coronavirus-related shutdowns puts tremendous pressure on beleaguered outlets. That is happening throughout the retail sector, but premier shopping districts like the Magnificent Mile across the U.S. are particularly vulnerable, as their landlords typically charge high rents, frequently for large flagship locations, costs many firms may no longer want to absorb.

“Some of our spaces are quite large and don’t lend themselves to being easily divided,” Bares said.

Apple’s former flagship store at 679 North Michigan Ave., a 30K SF space, has remained vacant since 2017, when the computer giant moved into a new flagship a few blocks to the south, she pointed out.

The vacancy rate of the Michigan Avenue portion of the district is about 20%, Bares estimated.

Union Square, San Francisco’s glitzy shopping district, saw its vacancy rate increase from 2% in 2014 to 6% last year, after losing Gump’s department store, according to the San Francisco Chronicle.

Other top U.S. retail trade areas are in even worse positions. On Upper Fifth Avenue in New York City, the vacancy rate hit 27.9% in 2019 after the loss of flagship outlets such as Gap, Ralph Lauren and Tommy Hilfiger, even as average asking rents increased to $2,697 per SF, according to Cushman & Wakefield.  

Reviving premier shopping districts in the midst of a pandemic won’t be easy, Bares added.

“Pre-COVID-19, I was going hard on the concept of experiential retail,” she said. “We would tell people, ‘Sure, you can buy that product online, but if you come down to our street, some stores will give you one-on-one service, and maybe even a glass of champagne.’ And not everything is retail, we also have the Jazz Philharmonic, the Driehaus Museum and the Museum of Contemporary Art.”   

In one way, that’s a message that should resonate with a locked-down population.

“It’s painful to be isolated the way we have been, and we have all of the experiences that people are craving,” Bares said.

But like all other retail stakeholders, her first task as the city begins to reopen is simply to reassure prospective customers that shopping is safe. Illinois Gov. J.B. Pritzker said nonessential retail can open this week when the state hits Phase 3 of his Restore Illinois plan, as long as stores maintain social distancing and follow other safety precautions.

Chicago businesses still need a green light from Mayor Lori Lightfoot, who said Thursday that most retail operations can resume on June 3.  

Bares, who serves on the Lightfoot’s Recovery Task Force, said the association will keep working to ensure retail staff have the required masks and personal protective equipment. But it remains to be seen whether they can maintain a balance between staying safe and providing the personal attention not possible with online shopping.

“It’s hard to do when everyone has to stay 6 feet apart,” Bares said.

One portion of the Magnificent Mile district will likely skate through the crisis unscathed. The small luxury boutiques that line Rush Street and Oak Street just off Michigan Avenue and charge the highest prices have a built-in customer base, according to Stone Real Estate principal John Vance.

“My sense is that luxury will come out of this test OK, because what we’re facing with this pandemic is a cash flow crunch, and for the most part, the luxury consumer doesn’t worry about cash,” he said.

Premier Shopping Districts Are Particularly Vulnerable To Pandemic And May Need A Reset
Starbucks Reserve Roastery at 646 North Michigan Ave.

Even though the Magnificent Mile and its counterparts in New York, San Francisco and many other cities are best known for luxury shopping, Vance said they host a wide range of retailers, many of which were troubled even before this spring.

“The Magnificent Mile has Tiffany, Burberry and Louis Vuitton, but there is also fast fashion and The Cheesecake Factory,” he said.

That means more bad news could be on the way before these top shopping districts can fully adjust to the pandemic era.

Luxury retailer Neiman Marcus filed for bankruptcy earlier this month, citing both a heavy pre-existing debt load and pressure brought on by the coronavirus pandemic, and Victoria’s Secret announced last week it would close 250 stores, raising the possibility that both firms could follow Roots’ lead and close their North Michigan Avenue stores.

Other companies looking to boost their bottom lines recently found it cost-effective to shed expensive leases, even retailers like Best Buy, which enjoyed healthy sales before the shutdowns. The Richfield, Minnesota-based company closed its 35K SF, two-level store at 875 North Michigan Ave. in November.   

“To really make an impact, they’re going to have to close some stores that are not just high-profile but have high rents,” Vance said. “This is happening across the board in many markets, so is Michigan Avenue going to be immune? No way.”   

Both Anthropologie and Nordstrom have Magnificent Mile and downtown State Street locations, and companies with similar setups may reconsider that strategy while the economy struggles.

“Do they really need two stores within a mile and a half of each other? I don’t know the answer to that. No one does yet.”

The average asking rent for retail space along North Michigan Avenue from the Chicago River to Oak Street is $350 per SF, according to a 2019 Newmark Knight Frank report. Downtown State Street spaces go for less than a third of that.

Vance said tenants and landlords along North Michigan Avenue may need to renegotiate leases and lower occupancy costs so retailers can survive, and eventually push the vacancy rate down to the low teens or single digits.

“I think there is going to have to be a market reset,” he said.     

Stone Real Estate will soon finish surveying several of Chicago’s top retail districts, including the Magnificent Mile and State Street, Vance said.

“We expect that the vacancy rate on Michigan Avenue, which was already pretty high, will increase post-COVID because some of the retailers are just not going to make it,” he said.

Bares said the district retains a lot of strength and can approach the post-pandemic era with a measure of confidence.

One of its most notable coups was landing a Starbucks Reserve Roastery, one of only six in the world. The 35K SF café opened in November at 646 North Michigan Ave., a former flagship Crate & Barrel store. It did blockbuster business, illustrating that the right stores can still generate huge foot traffic, Bares said.   

“We’ve got some of the most recognized brands in the country, the world, really, and these brands are frequently well-capitalized," she said. "Having said that, the future of retail is really up in the air.”

In six months, it will be clear how retailers are adapting to both the coronavirus and online competition, whether more decide to close or shift to different models with smaller stores or retain flagship outlets that showcase merchandise while they build out more robust online buying options, she added.

“It’s a conundrum, and we’ll have to see how the dust settles.”