Roaring Retail Market Shows Signs of Stress

CHICAGO-While the potential of a “housing bubble” has dominated real estate headlines, a bigger balloon may be hovering over North Michigan Avenue, suggests Northern Realty Group president Bruce Kaplan. “Michigan Avenue may be the best example on Earth of a market gone mad,” Kaplan told more than 400 at RealShare Chicago Thursday.

His company’s annual survey of the two-million-sf North Michigan Avenue retail market suggests the air is going out of the balloon. Despite some of the highest rents in the US, asking rent rates along the “Magnificent Mile” have fallen for three straight years, while vacancy has increased for two years in a row. While vacancy has jumped more than two points in a year to 7.1%, asking rental rates have fallen 40% to $35 per sf.

While the retail sector was crowned king among local product types, Kaplan all but declared the regional shopping center an endangered species, noting virtually none are being built now, while “lifestyle” centers are the rage. Meanwhile, as Walgreens stores have become the product of choice among anxious Section 1031 investors, cap rates for those properties have dropped to the 6.5% range.